Choosing a mortgage loan that fits your budget and lifestyle means making some choices. One of the most important is whether to go with a fixed rate mortgage (FRM) or an adjustable rate mortgage (ARM). One is not necessarily “better” than the other; the goal should be matching the right kind of mortgage with the borrower’s needs.. It’s simply not a guaranteed payment over the life of the loan, as the fixed rate is.
With a fixed rate mortgage, you’ll have a rate that you agreed to at “lock in” time (when you agree with your loan officer that a particular rate is what you want and the loan officer officially reserves that rate for you). That rate will stay the same as long as you have the mortgage; you can choose a short term, such as 10 or 15 years, or a longer term, such as 25 or 30. Shorter terms have lower rates, but much higher payments.
No one has a crystal ball, but if your plan is to keep the property for several years or more, a fixed rate may offer peace of mind, knowing that your budget won’t change. Each month, year after year, your payment will be exactly the same for the loan repayment. **
** The actual loan repayment piece of your total monthly payment is the principal and interest (P&I). The total amount you send to the lender each month may change, however, if your taxes and homeowner’s insurance are included in the payment. Real estate taxes and insurance typically go up over the years. You’ll pay 1/12th of the annual amount of each with your payment. Once per year your escrow account (that’s is where your money for taxes and insurance sits and waits for those bills to come due) is evaluated to be sure the right amount is being collected. If the taxes or insurance have increased, your payment will increase, too, so that the escrow account always has enough in it to pay your bills.
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