There are several types of mortgage loans with varying mortgage interest rates being offered by banks and other financial institutions to borrowers. Securing a great mortgage rate on one of these mortgage loans means first determining which type of loan best suits you. Though there are specialized mortgages for military, veterans and first-time home buyers, most borrowers do not fall into any special category and are mostly concerned with choosing from the two most common mortgage loan options.
Montgomery Banking Rates provides a comparison of these two more well-known mortgage loan types and explains the types of borrowers they may benefit. Consider which category you fall into to better prepare you for mortgage loan shopping.
Fixed Rate Mortgage: A fixed rate mortgage loan is exactly that – fixed. The interest rate never changes, even if the economy takes a downturn. Your mortgage payment will remain the same for the entire term of your loan.
Usually, the longer the term of your loan, the higher the home mortgage loan rate will be. This is because the lender must assume more risk as the future of average interest rates becomes less predictable and could possibly rise significantly. Fixed rate mortgages grant you the stability and certainty of home loan payments that never change and are best for those who prefer to possibly pay more in interest in order to avoid the risk of it skyrocketing in the future.
Adjustable Rate Mortgage: Adjustable rate mortgages differ from their fixed rate counterparts because the interest rate rises and falls over time. Your loan rate is determined by comparing it with average interest rates set by a defined index. Generally, ARMs have a cap on the monthly payment or overall interest in order to protect you from unaffordable future payments should there be a sharp rise in interest rates. The point of having an adjustable rate mortgage is that you will most likely pay less over time. This type of mortgage loan will benefit those willing to accept some risk in order to possibly pay a lower mortgage rate in the long-term.