When taking out a large loan, such as a mortgage loan, the type of interest that you are charged can have a huge impact on how much you end up repaying in the long run. This is why it is so important to not only understand what interest rate you are being charged, but how your overall interest payment is being calculated. Below you will learn more about a few of the most popular types of mortgage loans and the interest that applies to each option so that you can ultimately choose the loan product that is right for you.
Fixed Rate Mortgages
Fixed rate mortgages guarantee your rate of interest for the life of your loan. For instance, if you are being charged 4% interest at the time your mortgage is acquired, you will continue to pay 4% interest even if the average rate skyrockets to 7% during the life of your loan. However, you will also continue to pay 4% interest if the average rate drops to just 2% interest during the life of your loan.
With a fixed rate mortgage, your mortgage payment will remain the same each month since the amount of interest due does not fluctuate. This allows for easier budgeting each month. This type of mortgage will also allow you to determine exactly how much you are expected to repay before deciding whether or not to take the loan.
Adjustable Rate Mortgages
Unlike fixed rate mortgages, adjustable rate mortgages will not guarantee your current interest rate. Instead, each time the average market rate fluctuates, so will your current mortgage payment. While this type of mortgage rate provides for the possibility of a lower interest rate in the future, it also comes with the risk of a higher interest rate.
Since there is no way to predict what interest rates will do a year from now, let alone thirty years from now, it is simply impossible to calculate your total rate of repayment when choosing an adjustable rate mortgage. Consequently, while these mortgages will prove quite beneficial for many people, they are not right for individuals who have limited resources or who are uncomfortable taking financial risks.
The Bottom Line
If you are looking for a stable monthly payment, a fixed rate mortgage will be your best option. However, if you are willing to take a bit of a risk in the hopes of securing a lower interest rate in the years to come, an adjustable mortgage will give the opportunity that you are looking for.