A vital question that faces most homeowners at some stage is whether or not to opt for a fixed rate or variable mortgage. The age-old weighing up of security over potential savings is one that has plagued buyers for decades, and one to which there is no definitive right or wrong answer. Both variable and have advantages and disadvantages, but with the right financial advice it should be easy to understand which type of mortgage relates to your situation and can provide you with the best chance of financial freedom in years to come.
The standard type of mortgage is variable; that is the rate of interest repayments is variable against the Bank of England base rate. An alternative to that is the fixed rate mortgage, which sets a fixed rate of interest to provide buyers with a guarantee of exactly what price they will be required to pay for their borrowing. The main question faced by prospective borrowers is whether to gamble and secure a rate, which may ultimately be higher throughout the duration of repayment, or whether they want to rely on the base rate for lending as a guide to the extent of their repayments. Either option could be considered a gamble against the interest rates, and both can provide their own financial benefits at the end of the day.
With a standard type of mortgage, economic security is the order of the day, and if the economy goes through a stable period, you are more likely to have to repay less over time. While rates are low, that is also the time to secure a fixed rate mortgage, securing your interest rate forever more to avoid the insecurity of relying on a fluctuating rate. The problem with fixed rate is that the rate is generally fixed at a proportionately raised rate above the base rate before it is fixed, therefore it can prove to be expensive if the economy ultimately performs well over the duration of the mortgage repayments.
One of the major benefits of a fixed rate mortgage is the ability to budget accurately. With the uncertainty of a variable mortgage, it can often be hard to manage your finances, and if interest rates increase in may eventually find it impossible to live within your planned budget, making for a tough financial situation ahead. However, the fixed rate mortgage guarantees a level of repayment which, although it may be high, is at least fixed to allow secure budgeting over the longer term.
Either way, selecting a mortgage comes down to your individual circumstances, and although it may be a tough decision it is important to make sure you fully consider the available options before committing yourself. It comes down to a choice between security and the potential for savings over the term of the mortgage. With appropriate guidance and advice, you should be able to make the decision that best suits your needs and circumstances to provide you with the best option.
When you purchased your home, you most likely got a fixed interest rate mortgage with a 15 or 30 year term. These are the most popular mortgages in the industry. Even in the summer of 2004, when the interest-only or simple interest mortgage loans became popular, the average American stuck to the fixed rate. You see, the fixed rate offers security to conservative people, and the average American home buyer and home owner is a very conservative person.
Today, it's time to ignore that conservative nature and throw out that fixed rate mortgage. If you have a home, no matter when you purchased or refinanced your mortgage, you now need to refinance your fixed interest rate mortgage to an adjustable rate mortgage.
Now, before you begin to panic and start calling me all kinds of unsavory names, read on, and you'll see why an ARM is actually a cash goldmine, and you need to start panning for this gold immediately.
When I was originating loans fulltime, I could barely get the word ARM out of my mouth, before the customer would say, "Oh no! I don't want an adjustable mortgage. I've heard how the rates change and your payment skyrockets, and some people actually lose their homes. No, no, I don't want my rate to change." Of course, once I illustrated the thousands of dollars they would save in just a few years and quashed all of those myths about loan payments "blowing up," most of them decided the ARM was not the "devil loan" it's made out to be.
But why risk an adjustment of your rate, you may ask, when you can have it fixed for the life of the loan? The answer is twofold and quite simple. The first part is the most important, and that is the average American either sells or refinances his or her home in four to seven years. So, if the chances are that you'll sell or refinance in five years, why fix your rate for 30 years at a higher interest than you can get on an ARM?
The second reason to get an Adjustable Rate Mortgage is because the interest rates are so much lower than fixed rates. And since these great rates are fixed for a particular period, five years on a 5-year ARM and three years on a 3-year ARM, there really is no risk, at all. Again, in most adjustable rate mortgage programs, the interest rate does not adjust monthly or yearly (although programs with these types of adjustment periods do exist at much lower rates).
For example, as of publication of this article in 2004, the 30-year fixed rate mortgage was going for around 5.75%, and a 5-year Adjustable Rate Mortgage was going for about 4%. Suppose you're financing $100,000. The 30-year fixed rate of 5.75% would give you a monthly payment of $583.57 (not including your taxes and insurance, which vary from state to state and county to county). The same $100,000 financed at 4.0% interest yields a monthly payment of $477.42. The difference in these two payments is $106.15. This is $1,273.80 each year, and $6,369.00 for five years. I can hear you saying, "Wow, that's hard to believe," but these are real numbers and real savings. You may be saying, "Sure, but the rates change." This is true, but the difference in the fixed rate mortgages and the ARMs is almost always the same, regardless of what rates the market bears, so you'll always save a ton of money in the difference in these two payments.
The numbers are even more staggering if you finance $150,000. The fixed rate payment is $875.36 and the 5-year ARM payment is $716.12 - a monthly savings of $159.24 and over $9,500 for five years. If you buy or refinance a home and finance $200,000 or more, you'll save between $13,000 and $15,000 over five years, with the 4% rate as opposed to the fixed rate of 5.75%.
Bank that money and you can buy a decent car for cash, or pay for a year of college, or take a European vacation. Pretty powerful stuff, huh? Now, if you're one of those people who is really into cutting into the term of your mortgage, and you can afford the higher fixed-rate payment, simply apply the difference back to the principal loan amount. You'll build equity in your home very quickly, and you'll always have the option of paying the lower payment.
So, get your adjustable rate mortgage today, and start using your own personal goldmine.
Both Graeme & Totty100 are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Graeme has sinced written about articles on various topics from Mortgage, Management and tax. Graeme Nicholson is a Famous writter for individual savings account. The author writes about and. Graeme's top article generates over 9900 views. to your Favourites.
Totty100 has sinced written about articles on various topics from Gardening, Entrepreneurship and Landscaping. . Totty100's top article generates over 14800 views. to your Favourites.