Fixed Rate Mortgages Versus Adjustable Rate Mortgages

When it comes to mortgage loans, whether they’re in Denver or some other city, the average borrower will have to choose from two main types of loans: fixed rate mortgage loans and adjustable rate mortgage loans.
This choice may turn out to be the most important one that you’ll make during your decision making process as to how you’ll be financing your home. The overall mortgage formula used to determine how much you’ll pay based on your interest rate will be the same for both kinds of loans, but there’s a very good chance that your monthly payments will vary between the two throughout the life of the loan.

Considering the adjustable rate option should only be done if you’re financially secure enough to handle the maximum payment stipulated in your contract, you’ll also need the emotional maturity to handle volatile rates and changing monthly payments.

Adjustable rate mortgage loans are widely blamed to be the source or at least the igniter of this economic hardship that the whole world is going through. Lots of individuals whether they were aware of it or not were taking on loans that they couldn’t afford in the first place, which lead them to default en masse. This happened because an adjustable rate mortgage or ARM, comes with an initial low interest rate, which is lower than the rate for a similar loan would be with a fixed rate mortgage. After that honeymoon period of a couple of years, the rates start to adjust and as we’ve seen they adjusted up, way beyond the rates of a fixed rate loan for the same amount.

The crucial factor when considering an adjustable rate loan is the amount of time that you’ll be spending in the home. This is due to the fact that during the first couple of years thanks to the very low interest rate you’ll be able to save money that you’d otherwise have to pay if you had a fixed rate loan, however when the loan adjusts you may lose all the savings that you’ve accrued over the first couple of years. This means that if you don’t plan on staying in the home for more than four or five years, you may come out ahead with an adjustable rate loan because of the lower interest rate during that time,

The inherent problem with adjustable rate loans, whether they’re in Denver or not, is the fact that no one can predict the future of interest rates or of the real estate market in general. Logic would have us believe that if the rates are increasing then you’d be better off with a fixed rate mortgage, but logic and statistics can never predict future events in the real estate market, they can only study them after the fact. Case and point, nobody was expecting the credit crunch in America to be of such large proportions as it was and affecting the entire global economy in ways that no one could have imagined before 2008.

Talking about fixed rate mortgage loans now for a bit, it’s interesting to know that a lender considers that he is taking an extra risk when committing to your constant interest rate for ten, twenty or thirty years because just like the rest of the world, the lenders don’t know where the market is going either. If the overall rates increase your lender will have to continue to ask for what he is contractually obligated thus robbing him of profit, this is why lenders will charge you a premium on your fixed rate loan for their risk, however if you’re planning to live in the house for more than five to seven years then you’ll be better served by a fixed rate loan.