Is A Fixed-Rate Mortgage (FRM) Or Variable-Rate Mortgage (VRM) Best For You?
These two types of loans are the main choices a person has when looking for a loan with which to purchase a home. Making the choice of a fixed-rate mortgage (FRM) or variable-rate mortgage (VRM) is not an easy one to make. A lot of money could depend on the choice you make and both are excellent ways of financing a home loan.
One of the main factors between these two loan types is the probable amount of interest you will pay over the term of the note. Knowing if you will be able to make the payments each and every month is vital. Once that has been determined, you can take the time to examine these two options.
Neither option alters the payment itself, but rather the amount of interest you will pay each month and the amount that is applied to the principle. Most know that banks and lending institutions will take their money first. Simply put, the largest amount of the payment is applied to the interest with little going on the principal. Over time the interest drops and the principal payment increases.
There are those who purchase a home and live there most of their lives. Don’t be at the mercy of a fluctuating payment for those years, you may want to opt for the fixed interest amount. In this case the interest is determined based on the going rate. Adding that amount to the homes’ purchase price is spread out over the next 30 years. Your payment is set.
With the variable loan rates, the purchase price never changes, but the interest you pay can have a positive effect on how high or low your payment goes. An interest change of just one percent can alter a payment quite a bit when the cost of a home is the determining factor. This can change once every year or once every ten years but the average time is three or five years. Most lending agencies will offer a low rate to start with and that low payment will draw the first time buyer in.
As the borrower, the initial variable amount should afford savings to cover possible payment increases. If it allows you to lower the principal by a large amount and an increase will still see you making a profit, the variable may be your best choice. Another reason for going this route is if the home purchase is expected to be short term. In this case, it could save you a lot of money.
The VRM can also end up with the payments dropping. The recent economic downtrend has seen most ARM’s dropping at a fast rate due to lower prime. Still the applicant must decide that if the payment increases, can their budget handle higher payments.
Anyone seeking a mortgage would be foolish not to look for the lowest rate possible. The Truth in Lending Act guarantees that any banker or finance officer has to disclose all possible changes your loan could undergo. The variable is capped and it stops rising at a certain point offering the mortgagee some security. Whether you choose fixed or variable, do your homework and opt for the one that fits your budget the best.