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Fixed or Adjustable Rate? Which is Best for Your New Home?

Posted by  on Apr 16, 2009
 
People that are making the big decision to buy a home need to be aware of all their options. While it might seem like a simple transaction, purchasing a home is not as easy as finding money and giving it to the homeowner that is selling. Because this is such a large monetary transaction, you need to find out how to best spend that money now and in the future.

Because you will need to pay for the money you borrow from a bank, you need to be aware of how much interest they are charging you during the length of your loan. The more interest you will be paying them, the less money you will have for yourself, so it's in your best 'interest' to find a loan that doesn't require you to pay as much towards interest. This is where the debate of fixed or adjustable rate interest comes into play. Is there one that is better than the other or is it simply a decision that works until it doesn't, depending on the market?

A fixed rate mortgage is an arrangement in which you have a certain percentage of interest that you will pay on your home that will never change. This is helpful for those that don't want to worry about fluctuating changes in the market or those who don't want to have to worry about changes in their mortgage payments. Over the life of the loan, this interest rate will never go up and it will never go down. This is reassuring to many homeowners that want to have a stable figure with which to plan their budgets.

But an ARM or adjustable rate mortgage, might be a better choice for those who are willing to adjust to the interest rate, as prescribed by the housing market. Their interest rates will fluctuate as determined by the housing market, allowing them to save money if the interest rate dips down, but if the rate goes up, they will need to pay more. It has been shown that in the long run, those that choose adjustable rate mortgages are going to pay less than their fixed rate counterparts. That difference, however, is minimal.

Which is the better choice for you? That will depend on your current financial security, as well as your future financial plans. Those with stable jobs that will continue for years might feel better about a fixed rate mortgage as they will always know what they need to pay off, even working toward paying off the amount more quickly. But if you have a stable job and job prospects, an ARM might help you save money, too.

Those with children may want to consider a fixed rate mortgage as this will help them be able to control their budgets more easily, while singles or married couples without children might be more willing to take the risk of having an ARM plan in place.

In the end, it all comes down to what you are comfortable with in terms of the money you're spending on your home. If you plan on living in your home for a long time, the fixed rate mortgage might be a good choice for you, while the adjustable rate might not be agreeable.

The debate over whether a fixed rate or an adjustable rate mortgage may never be resolved. In recent years, it has seemed like the ARM plan was the better option, but with rising costs of living, rising interest rates, and increasing gasoline prices, these savings may offset at the same time. It will help if you calculate the risk that you want to take in terms of your housing costs and then make a decision based on your self-assessment.

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