Many people who are looking to purchase a home are not to familiar with the loan process and are wondering “what is the difference between a fixed rate and an adjustable rate mortgage.”
First off I would like to say that it would be a huge mistake taking on an adjustable rate mortgage(ARM) or commonly called a subprime mortgage. ARM mortgages are offered to borrowers that do not qualify for a regular loan because they have a low credit score (typically under 600). Many people believe that subprime mortgages given between the years 2002-2006 may be the reason the United States is in this mortgage crisis today.
Below listed is the definition of both a fixed rate and adjustable rate mortgage.
Fixed rate mortgage:
With a fixed rate loan you will pay the same interest rate for the entire loan. The term of these loans usually last anywhere from fifteen, thirty, to forty years. No matter what happens to the market or the properties value the interest rate will remain the same throughout the entire term of the loan.
These loans are the much better choice and are proven to be much more successful down the road for the homeowner. The amount you pay monthly in the beginning will remain the same forever so there will be no shocking surprises of a higher mortgage payment.
Adjustable Rate Mortgage (APR):
ARM loans were established for people who did not have good credit, but are still wanting to purchase a home. The borrower did not qualify for a conventional loan because they did not have the history to prove they can make the monthly payments. Because of the low credit score the lender looks at the borrower as a much higher risk then someone with good credit.
Therefore, the lender will give the borrower a much higher interest rate on the mortgage than a regular loan. Over a certain amount of time this loan will start to adjust to a higher interest rate and you will see the monthly payment increase very fast.
That’s why it is not a good idea to get yourself into this type of loan. At first it may seem great with a comfortable payment, but later when your nice and settled you all of a sudden are faced with a new payment that is simply just not affordable.
So remember when applying for a loan to always try to get a fixed rate mortgage. The adjustable rate mortgages are the reason the foreclosure rates are higher than ever in the United States.