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Interest Rates and Home Loans – Fixed Rate Mortgages may be better than Adjustable Rates

June 14th, 2006

Interest Rates and Home Loans – Fixed Rate Mortgages may be better than Adjustable Rates

Real Estate

Considering the current trend of inflation, gas prices, and the cost of the Iraq war, interest rates may continue to rise for some time making the fixed rate home loan very desirable.  When shopping for a home loan you will find that many loans are adjustable rate, interest only, or fixed rate.  If you plan to live in your home for a very long time then fixed rate is definitely for you.  If you plan to live in a home for only two or three years, you might consider the adjustable rate and interest only, or a temporary fixed rate home loan.

The benefits of an adjustable rate loan is that the interest rates are often lower than a fixed rate loan, the bad part of this type of loan is that when interest rates go up, so do your monthly payments.  It is usually easier to qualify for the adjustable rate loans. 

 

With a fixed rate home loan you will be able to budget your month to month expenses and have a predictable re-payment plan.  Fixed rate also means that you can save money when increased interest rates don’t apply to you. In the long run this can add up to a lot of extra money in interest paid.  You may not see the value in the first few years of a fixed rate loan, but over the lifetime of the loan you will likely have saved money on the interest because it did not fluctuate.

Interest only loans make it possible to afford approximately a 25% more expensive home compared to a traditional home loan.  You can shop for either adjustable rate or fixed rate on these loans.  The lender usually offers a 10 year time period to pay interest only with no principal repayment.  After that time period ends, you begin to pay the principal along with the interest.  If you do this type of loan you should be prepared to pay the increase after the 10 year time period.  If you are not able to do this in 10 years, you are venturing in a risky loan and may have to sell or may even lose the house.

 

You need to watch out for temporary fixed rate loans.  There are 5-year fixed (30 year term) loans that switch to an adjustable rate after the first five years of the loan.  This type of fixed rate loan has a time limit.  Chances are if you go with this loan you are betting on being able to refinance before it becomes an adjustable rate.  If not you could be stuck riding out the interest rates as they increase and decrease over the years.  If you plan to sell your home before the 5 years are up you should consider this type of home loan.

Where do you apply for a home loan and how do you get the best rates?  You can use a broker either in person or online that will shop for you will multiple lenders.  Brokers are good at finding a loan that you can qualify for and more than likely at the lowest rate.  The bad part is that you will pay points on the loans offered with the broker.  Online brokers may be better because they give you a complete listing of loans and terms offered, making it your decision.   If you shop directly with the bank you can avoid paying points up front to close the loan, however this can be a lot of work.

 

Make sure that you understand the terms of the loan completely before agreeing with the proposed loan.  If you are not sure that you will be able to role with the adjustable interest rates on a home loan, you might want to regroup and plan how you can achieve a 30 year fixed rate mortgage.  It could mean that you need to improve your credit rating, increase your income, or save up a larger down payment.

 
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Nicole Wilson
Best Syndication

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Important:  The material on Best Syndication is for informational purposes only and is not meant to be advice. You should always seek professional advice before making financial decisions. 
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