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Fixed Rate Adjustable Rate Mortgage
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Mortgage is defined as using some immovable property as collateral in return for money from a lender. If the debt is repaid, the borrower retains the property ownership. However, if the debt is not repaid, the lender takes possession of the property.
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There are two major types of mortgage loans depending on the mode of interest rates and mode of repayment. These include fixed-rate mortgage loans and adjustable-rate mortgage loans.
Fixed-rate mortgages: These are traditional types of mortgage loans where the interest rate on the loan amount is locked and does not change throughout the entire term of the loan. The borrower will be paying the same amount of money every month. There are three different types of fixed-rate mortgage loans depending on the repayment term. These include 15-year, 20-year and 30-year fixed-rate mortgage loans. Higher the repayment term, lower will be the monthly mortgage payment amount. Fixed-rate mortgage loans are preferred by borrowers who have a good credit score.
Adjustable-rate mortgages: In these types of loans, both the interest and monthly payments vary depending on the market rates and economic trends. ARMs are offered at very low interest rates for the initial 2-3 years, after which the interest rates are rescheduled according to market conditions. Rescheduling of interest rates in these types of loans depends on Treasury’s Securities Index. Hence, these interest rates are always subjected to fluctuations. Similarly, the monthly mortgage payments usually tend to differ from time to time. These types of loans are generally preferred by borrowers who have a bad credit history or those who are undergoing an unstable financial situation. Adjustment of the interest rate is determined according to the loan repayment term. A borrower can choose a six-month ARM, one-year ARM or even a 2-year ARM. This is the time period where interest rates are low and remain fixed. Once this period is complete, interest rates vary. For example, in case of a 5/1-year ARM, the interest rates will be low during the initial 5 years and then would adjust every year beginning with the sixth year.
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