Find Out the Advantages and Disadvantages of a Mortgage
Deciding to take out a mortgage to purchase a home can be a big financial decision to make and should be taken with alot of consideration. A mortgage is a financial obligation that will play a significant role in your life due to the long term commitment required. This is something that will last most of your lifetime , unless you manage to pay your mortgage off early. It is extremely important to understand the differences between a fixed mortgage rate or an adjustable mortgage rate.
Most people who know a little about mortgages may suggest opting for a fixed mortgage rate due to the lower risks involved than a variable rate. With today’s housing slump, many who have adjustable mortgages have suffered greatly due to ballooning mortgage rates causing huge surges in their mortgage payments and forcing many homeowners to sell below market value, or face foreclosure.
With a fixed mortgage rate the interest stays fixed through out the term, preventing fluctuations with the monthly payments. With an adjustable mortgage rate, the interest will rise and fall withing the current state of the economy at any given time. In some cases this may be beneficial if interest rates fall dramatically, however , it can leave any borrower in a precarious situation if the rates rise above the homeowner’s ability to cover the monthly payments.
Some of the disadvantages to a fixed mortgage rate are that they tend to have higher interest rates than adjustable mortgages.
Also a fixed rate is not set for the full term of the mortgage. For example if a person takes out a 25 year mortgage, when the rates are extremely low, the borrower will only be able to take advantage of the given rate for a set period of time. Fixed rates are usually set at 3-5 year intervals in which they are subjected to revision by the banks to adjust with the current economy. With inflation constantly on the rise, the rates are usually subjected to an increase.
However this is not always the case, for those who had taken out a mortgage 5 years ago when the real estate market was booming, and are now about to fore go a revision by the banks today, could really benefit from the current low interest rates available today.
Another disadvantage with a fixed mortgage rate, is that the costs to refinance will be substantially higher as opposed to having an adjustable mortgage rate.
These are just a few basics to consider when you are looking to purchase a home, it is always best to consult with a professional mortgage broker or your lending institution to get a better idea what may best suit your personal financial situation and needs.
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