Fixed Rate Loans for Long Term Savings

2007-03-08 10:33:40

( Insurance )



Types of Mortgages

When you borrow money, you need to choose the type of mortgage package you will take. Sometimes the lender advises you what you can qualify for.

There are two basic forms of mortgages - fixed rate and adjustable rate. Under fixed rate, the interest rate remains the same throughout the loan's life. In an adjustable rate mortgage, the rates change periodically and can have differences from a few decimals to a few whole points. Sometimes, the rate is fixed for a certain period of time, then it becomes adjustable.

Normally, both types of mortgages are payable in 30 years, but depending on your circumstances, you can have a shorter payment period. Of course, your amortization payment amount is higher if your loan period is shorter.

There are some variations which combine the features of both mortgage types. The interest rate could be fixed during the first few years, then adjustable thereafter.

Another variation is the fixed rate HELOC, which stands for HOME EQUITY LINE OF CREDIT. It is a loan set up as a line of credit for a maximum amount you can borrow, rather than for a fixed dollar amount. The loan's interest rate will always be the same. The fixed rate HELOC is used as refinancing or second mortgage by borrowers.

Advantages and Disadvantages of Fixed Rate Mortgages

Since the interest rate and terms for a fixed rate mortgage will not change, it will be easier for you to plan ahead for your obligations. You don't have to worry about economic changes and how they might affect your loan rate.

It is also easier to see how your loan balance slowly dwindles as the fixed rate has a self-amortizing structure. As long as you plan to keep the property for the entire duration of the loan, a fixed rate structure would be most ideal for you.

This type of mortgage is quite secure and predictable especially if economic trends remain stable. But you may end up paying more interest than necessary if prevailing rates were to drop by significant amounts.

A good tip is to consider refinancing once there's a decreasing trend in interest rates, so that you will be able to save on interest charges. Always keep an eye out for the trends so that you will know exactly when go for refinancing.


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