Home Mortgage Loan

By: EconomyWatch Content   Date: 30 November 2009

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One of the most common issues a home buyer encounters when looking for a home mortgage loan is choosing the right type of loan. Broadly speaking, mortgage home loans are divided into two categories, namely fixed rate mortgage loans and adjustable rate mortgage (ARM) loans. 

Fixed-Rate Home Mortgage Loans: Pros & Cons

In a fixed rate home mortgage loan, the interest rate remains the same throughout the term of the loan. The major advantage is that the monthly mortgage payment does not change throughout the life of the loan. You needn’t bother about any change in the conditions of the economy. The major disadvantage is that the interest rate of a fixed rate mortgage loan is usually higher than that of a adjustable rate mortgage. A mortgage lender takes risks when he grants a loan for a period of 30 to 40 years. The interest rates may either increase or decrease over this period, based on changes in the prime rate. To cover this risk, a mortgage lender charges a higher interest rate for a fixed rate home mortgage loan.

Adjustable Rate Mortgage Home Loans: Pros & Cons

In an adjustable rate home mortgage loan, the interest rate changes throughout the term of the loan, based on changes in the country’s economic conditions. Adjustable rate mortgages typically have fixed interest rates for a period of three to five years. The major advantage is that the interest rate during this period is always lower than that for fixed mortgages. The loan converts into an adjustable rate one once the introductory period is over. The monthly mortgage payment changes based on changes in the interest rates. The major disadvantage is that it is difficult to predict the direction of the interest rates and the repayment amount.

It is good to opt for a fixed rate home mortgage loan if you plan to live in the house for three years or more. However, if you plan to sell your home in a few years, it is better to opt for an adjustable rate mortgage so that you can enjoy lower interest rates while you own the house.


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