Home Loan Interest Rates - What Are The Key Features Of Fixed Rate And ARM's?

When you're choosing a home loan, there are two big decisions you need to make, namely whether to take a fixed interest rate or an adjustable interest rate mortgage.

It is important for you to be aware of what these different type of home loan interest rates encompass and also know which one would be suitable to your needs and circumstances.

Fixed-Rate Mortgage

1. A fixed-rate mortgage is a mortgage with an interest rate that is fixed for the life of the loan and the debt is amortized, or paid in equal monthly installments for the entire amortization period, be it 30 years, 15 years, or 20 years.

2. What are the advantages for a fixed-rate mortgage? The main advantage is that you know precisely how much each repayment will be over the long term. Even if market interest rate rise, you can lock in lower rates.

3. This type of a loan is suitable for someone in not keen on movements in home loan interest rates, and who does not want to constantly review the performance of market interest rates.

4. A fixed-rate mortgage is also suitable for people with a fixed income, for those who do not want ‘surprises' in the form of sudden changes in their monthly repayments. With this type of a loan, you have certainty that as the years go by, your payment will remain the same, and you will pay exactly the same amount until you finish paying your mortgage. If you are the sort of person who does not like uncertainty as far as future interest rate increases are concerned, then this is your loan.

Adjustable Rate Mortgage

1. An adjustable-rate mortgage (ARM) is one where lenders lift or lower the interest rate as interest rates in the wider market change, meaning that your repayments may go up or down. The home loan interest rates are adjusted periodically to keep it in line with changing market rates.

2. What are the advantages for an ARM? This type of a loan has a lower start interest rate, and it is relatively easy to qualify. In addition, one can also be able to predict the direction of the rates in advance, but not always. From the lenders or bankers point of view, this loan type is better because the loan stays close to their cost of funds, thus enabling them to match their assets to their liabilities.

3. A mortgage with an adjustable rate is suitable for people who are good planners and who have alternative sources of funds or disposable assets. In order to manage an adjustable-rate mortgage properly, one need very good cash-flow management skill. This loan would also be good if you anticipate windfall profits that will allow you to reduce the principle substantially, thereby lowering your monthly debt. The preliminary payments for this type of a home loan tend to lower, as lenders offer lower initial rates to attract potential home buyers into the deal.

4. With an ARM, you can qualify for a higher loan amount. So if you expect some career advancements and subsequent salary increase, then this type of a mortgage rate will be suitable for you. If the interest rates decline, your repayments are lowered, and this may be a good ‘bonus' to get. With good planning, that "bonus" should let you to handle the increases in home loan interest rates comfortably, or to add to your payment amount to reduce the principle balance of your loan.

It is important that you are fully aware of what these different types of mortgage interest rate imply, the advantages and disadvantages involved; so that you can decide which one is the best for you.