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Fixed or Adjustable Home Loan Rate – Factors To Consider When Choosing One

For most people, the toughest decision is of whether to go for a fixed or adjustable home loan rate. Here we weigh the pros and cons.
 
One of the most perplexing questions most home mortgage seekers are plagued with is whether to go for a fixed or adjustable home loan rate. Here are some tips to help you reach an informed conclusion.
 
What they imply
 
A fixed home loan rate is one where the interest rate never varies. That automatically means that every month you end up paying a fixed amount. Thus the monthly payment remains the same throughout the entire term of the loan. This type of interest rate is good for those people who don’t want to take on any risk and want added security in their mortgage terms. On the other hand in the case of adjustable rates, the rate will vary depending on market conditions. This can work either way for the borrower. If the overall interest rates in the market are low then it implies an automatic saving for the borrower and if the rates rise, it can mean more expenses.
 
Decision on Fixed or Adjustable Rates Based on Short or Long term stays
 
If you plan on staying in your existing home for a long time, then a fixed home loan rate is the best choice. This will keep down your monthly mortgage payment to a bare minimum plus you will have the added security of knowing that your payments are not going to rise. On the other hand, if you don’t intend on staying in the existing house for too long, then an adjustable rate on the loan is best. You can save a lot of money if the market rates are expected to dip further.
 
Cap on the increase
 
While an adjustable home loan rate can be beneficial for short duration stays, it can work out quite expensive if rates rise unexpectedly in the future. Therefore in order to save on money and prevent too much increase in the prices, you need to place a cap on the increase. Usually the cap is around 2%, which means that the interest rate cannot increase more than this amount. You can also negotiate with the lender on making the frequency of increase a little more flexible. For example while some lending institutions will increase the amount every 3 months or so, some others may increase every few years. You, as a borrower, have the right to bargain to ensure the best deal.
 
Choose the Type According to Your Personal Goals
 
Both the fixed as well as adjustable home loan rate has their own advantages and disadvantages. None of the two is better of the other. Hence the ultimate choice of whether to go for the fixed one or the adjustable variety will largely depend on your personal goals. For instance, if you prefer lesser risk, then you can go for the fixed variety of interest. However, the fixed rate can work out to be much more expensive than the adjustable type. On the other hand, if you want to save on money while market rates are low, then the adjustable rate is best. However, it does carry a little risk with it.
 
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