What Are Your Mortgage Options?

What Are Your Mortgage Options?

Regions Mortgage - If you are thinking about getting a mortgage to purchase or build a house then you will come to find that there are 2 types of mortgages that are the most common. These are adjustable rate mortgages - aka ARMs - and fixed rate mortgages.

Fixed Rate Mortgages

With a fixed rate mortgage, there is a rate of interest that will remain the same throughout the entire term of the mortgage. Typically, this is for 30 years although there are fixed rate mortgages available for 15 and 20 year loans.

In general, the shorter the term of the loan is, the less the rate of interest will be. For example, for a 15 year loan the rate of interest can be a quarter to a half percent less than that of a 30 year mortgage. This means that with the shorter loan term you will pay less overall than what you would pay for a longer term loan even though the monthly payments might be - and generally are - higher.

A longer term loan might be easier to fit into your budget because the monthly payments will be smaller, but if you can afford the larger payments than it might be your best option to go with the shorter term mortgage.

No matter how long the length of the mortgage is that you opt for, a fixed rate mortgage is one that will keep you protected in the even as interest rates rise. That being said, since the rate that you go with will be locked in for the length of the mortgage, you might also be losing money if the rates of interest happen to fall.

ARMs or Adjustable Rate Mortgages

An ARM is a type of mortgage loan that allows for the rate of interest to be adjusted either up or down. This will depend on the economic trends that are current. See, the rate of interest for an ARM is based on something called the money market index. The most commonly used for this is the one year United States Treasury bill. That said, you might also find LIBOR - London Inter-Bank Offer Rate - CDs or other indexes being used.

In order to determine the ARM rate, your lender will add what is called a margin to the index. Typically this is between two and four percentage points.

While an ARM rate might be lower than a fixed rate at the outset of the loan, the rate can and will change with the market trends. That being said, there are typically limits to how high the rate of interest can go throughout the life of the mortgage. While these limits might offer you a bit of protection in the event the market changes drastically, the stability that is inherent in a fixed rate loan is not seen with an ARM.

All told, when you are considering taking out a mortgage, take a long hard look at the types as well as what your finances are so that you will make the choice that is best for you and your family.

Kathryn McDowell is a finance writer and has the goal to educate her readers about the finer points of a home mortgage. Know the facts so you can make an informed decision and be able to afford your home loan.

Source by http://ezinearticles.com and Written by Kathryn McDowell
Edited by Regions Mortgage