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The Mortgage Loan Basics
from: Mortage & Debt FactsThere are a number of different mortgage loan products out there, but they all have one thing in common: they have either a fixed or variable rate of interest tied to them.
The subprime loans that have been implicated in the housing bust were variable rate loans that adjusted at set intervals and were sold to mostly people with poor credit or who sought out jumbo loans.
So, even though a loan has a variable rate, it doesn’t necessarily make it a subprime loan and sometimes people get confused about that. They think that the reason people are in trouble are because they had Adjustable Rate Mortgages (ARMs). While that is one of the factors involved in people whose payments rise, subprime loans were targeted to people who couldn’t get a fixed rate mortgage because of either poor credit or a lack of income.
Otherwise, an ARM is just another type of mortgage loan that uses a variable rate. If you understand how it adjusts and you don’t buy too much house, even this type of loan can still be attractive to some.
A Fixed Rate Mortgage Loan
A fixed rate mortgage loan has an interest rate assigned either when it was locked in or at closing that remains the same for the life of the mortgage loan. If mortgage rates are rising, it is a good idea to lock in a rate when you are approved for a mortgage. Otherwise, by the time you get to closing the rates may have climbed significantly. However, it is difficult to time mortgage rates as they can fluctuate due to various factors.
The advantage of a fixed rate mortgage is that you always know what your payments will be, within a certain range. You may have adjustments for insurance or property taxes, but for the most part the payments will be pretty constant throughout the life of the loan.
Since the fixed mortgage rate is at historically low levels right now, many people like the idea of buying in with a fixed rate and not worrying about what might happen to the index later that can drastically change their payments.
A Variable Rate Mortgage Loan
A variable rate loan is one in which the interest rate is tied to a particular index and adjusts on a set schedule. There are a variety of mortgage loans with variable rates, not just ARMs. You can have a hybrid loan or even two-step mortgages that adjust after a specified period of time.
Be sure to read the terms of your loan to ascertain when the rate is due to change and how it will impact your monthly payments so there are no surprises in the future for you.
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