Are you looking for a safe and predictable mortgage loan? Most of the experts would recommend a fixed rate mortgage. It is the safest way to own a home, especially if your goal is to save extra money each month for other financial goals such as retirement. A good example of the FRMs dependable nature is a look back into history. Back in the 1960s when the lending industry was more honest and responsible, the FRM was the ONLY mortgage loan offered.Nowadays, lenders and bankers have invented and created a whole new category of loans (the adjustable rate mortgage or ARM), largely in order to make more money, though the loans are covertly disguised.
But keep in mind, a fixed rate mortgage is not fit for every single person.ARMs, in some cases can be of more benefit than a FRM. So let’s go over the basic facts about fixed rate mortgages to determine if they fit your situation or not.
A fixed rate mortgage is exactly that: a ‘fixed’ rate, meaning the amount you pay each month to pay off your loan will remain exactly the same.The interest rate is agreed to at the closing of your loan and does not change, even when rates on the market rise up or down.With a FRM, your interest rate stays the same until you’ve paid off the loan… But Beware!
Despite what most have been taught, interest rates are NOT the main consideration. The biggest error people make when looking for a loan is shopping for a rate.Why is rate shopping a huge No-No?The MAIN determinant of how much you pay for a loan is the TERM, or how long you are exposed to that debt… NOT the interest rate.Furthermore, if lenders encounter a ‘rate shopper’, they will purposely quote a very low rate to get your business, then jack up the rate later on in the process and blame it on the market.
Take a $100,000 loan at 5% for example. Focused on the interest rate? Most would assume the extra cost would be $5,000 in interest or a little more.This assumption is not correct, however. Paying $105,000 to get a $100,000 loan would only be the case if you were to completely repay the loan amount within one year.
And that’s not how mortgages work. It takes 30, 40 or even 50 years to completely pay off a mortgages loan. And the interest you end up paying gets more and more exponential as the number of years increases.
For example, at a 5% interest rate for a $100,000 loan for a 20-year term, you pay a total of $158,389 ($58,389 in interest).On a 30-year term, you pay $193,255.78.You pay over $90,000 to borrow $100,000!
This is why the term of your loan is so important.
This is why experts suggest getting the shortest term possible while still being able to keep up on your monthly payments.With a shorter term comes higher monthly payments.
The best situation for a FRM is when the homeowners plan to stay in their homes for a long time.The FRM’s predictable monthly payments will allow you to plan your finances and predictably save for future financial goals like retirement or extra cash savings. ARM loans are the opposite of FRMs, and if you plan on staying in your home for just a short period of time (3 to 5 years), you should consider an ARM loan. Home owners who are moving relatively soon can get an ARM loan for its low initial rate, and move out before the initial rate ends. But if your goals are to get a home and stay in it for a long time, a FRM will be more beneficial… and always remember the term is the most important part of any loan!
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