When you want to avail of home loan, there are several types of options available in the market. While it is true that no option is good or bad as it all depends upon your financial requirements, the interest rate regime and your repayment capacity, it is also true that you have to decide about the option keeping in view these factors. There are two basic packages available in the home loan market and they are fixed rate mortgages and adjustable rate mortgages.

Fixed Rate Mortgage
Fixed Rate Mortgage is a home loan where mortgage interest rates are fixed irrespective of the way interest rates move up and down in the market. In other words, your monthly equated installment and interest outgo is predetermined. This allows borrowers to plan their finances well in advance and budget the same accordingly. Generally fixed rate mortgages are a tad more expensive than the adjustable ones as they allow the borrowers to manage their risks more effectively in terms of payment schedule and amount over a period of time. The loan duration in these cases may range from 15 years to 30 years. In case of a 15 years loan, your mortgage rate is less but the monthly outgo is more while in case of a 30 year loan, mortgage rates are higher but the amount of outgo is quite less comparatively.

Adjustable Rate Mortgages (ARM)
Adjustable Rate Mortgages (ARM) are home loans where mortgage rates vary depending upon market conditions and interest rate movements. The rates here are lower than the fixed mortgage rates but are more risky especially if borrowers have availed loan during low interest rate regime. In case of rise in interest rates, your loan tenure is generally increased without increasing your monthly installment and thus you may end up repaying the loan over a longer period of time than you had bargained for initially at the time of obtaining the loan.

Trackback URI | Comments RSS