What Is the Difference Between Fixed Rate and Adjustable Rate Loans?
When obtaining a loan, there are many different financing options to choose from. Not only are there different loan programs, but there are also different loan terms.
A fixed rate loan is one in which all payments are equal for the term of the loan, fixed rate loans typically occur within a 15 year term or 30 year term.
For example: If you have a 4% interest rate with a 30yr. fixed loan term, and a principle and interest payment of $1550, your payments will always be $1550 for the entire 30 year term of that loan. This is also called a fully amortized loan.
With a fixed rate loan, you do not have to worry about the interest rate going up, or owing a balloon payment at the end of the loan. However, even if rates go down several years after you get the loan, your interest rate still remains fixed. So there are pros and cons to a fixed loan.
Adjustable rate loans are more complex than fixed rate loans, and have many more options.
An adjustable rate loan will many times have a "fixed period" after which the loan will adjust annually. For instance, a 5/1 adjustable rate mortgage, or 5/1 ARM, is one in which the first five years of the loan are fixed at a specific rate, and after the fixed period is over the rate will adjust up or down annually. The attraction to an Adjustable Rate Loan is that during the “fixed period” the interest rate is generally lower than a fixed rate loan.
Adjustable rate loans are popular for homebuyers who know they will only live in the home for a short period of time or those that want a lower payment for the “fixed rate” term and hope for rates to be lower in the future so that they can refinance OR that their incomes rise to cover the potentially higher monthly payment.
Is is important to go over these options with a mortgage professional to find out which option is best for you. For more information on whether or not your Debt-to-income ratios fall in line with mortgage guidelines, please contact a Dunhill Home Recommended Lender.
