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Fixed Rate Mortgages • Variable Rate Mortgages

mortgage application While there are a wide variety of mortgage types (from interest-only mortgages to 30-year fixed mortgages to option ARMs), they all fall into one of two categories:  fixed rate or variable rate.  Fixed rate mortgages have an interest rate that remains the same throughout the life of the loan.

The advantages of a fixed rate mortgage include:

  1. You won't ever be surprised.  No matter what interest rates do in the market, your monthly mortgage payment will remain the same every month for the life of your loan.
  2. You'll be able to easily budget your expenses.  Without surprises, you can make long-term plans, knowing what your mortgage payment (usually the largest of a household's monthly expenses) will be.
  3. It's simpler to understand.  The mortgage process is difficult, and some types of products have complex terms and conditions.  Between the two main types of mortgages, the fixed rate mortgage is the simplest to understand.

The disadvantages of a fixed rate mortgage include:

  1. Even if market interest rates fall, you are stuck with the interest rate you have.  If you have a fixed rate loan, you would have to refinance to take advantage of lower market interest rates.
  2. You'll pay a higher interest rate initially.  Variable rate mortgages are more risky (because you don't know if interest rates will rise or fall) so they come with a lower initial rate than their less-risky counterpart, fixed rate mortgages.  Visit Bankrate.com to find current interest rates for popular fixed rate mortgages and variable rate mortgage products.

To decide whether a fixed rate mortgage or variable rate mortgage is best for you, consider the following points:

  1. Educate yourself on the differences between fixed rate mortgages and variable rate mortgages.  More information is available from the Federal Reserve Board's Shopping for a Mortgage page, from Freddie Mac's Mortgage Process page, and from the Department of Housing and Urban Development's Buying a Home article.
  2. Ask yourself: How long am I planning to own this home?  If you plan to be there for the long haul, a fixed rate mortgage may be your best bet.
  3. Understand how current interest rates compare to historical rates.  If rates are going up, but still near historic lows, it might be a good time to lock in a low fixed rate.
  4. Think about your risk tolerance.  Fixed rate loans are the least risky type of mortgage.
  5. Analyze your budget as well as the difference between current fixed rate mortgage interest rates and variable rate mortgage interest rates.  If the difference is small, the added risk may not be worth the savings.

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