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In real estate, there are many terms and expressions exchanged between experienced industry professionals. For individuals who are unfamiliar with this industry language, these words and phrases may seem entirely foreign. With this in mind, terms such as adjustable-rate and fixed-rate mortgages may also seem confusing as well. To develop a more thorough understanding of these words as industry concepts, consider the brief overview below.

Conventional loans

In understanding the distinction between adjustable-rate and fixed-rate mortgages, you must first understand the concept of conventional loans. If you want a conventional home loan, you can either choose between the fixed-rate and the adjustable-rate mortgage.

Fixed-rate mortgages are more popular out of the two options because the interest rate remains the same throughout the duration of the loan, which provides a homeowner peace of mind because of its predictability. Since it's the same figure each month, it is easier to budget. Conversely, in an adjustable-rate mortgage, the interest rate is applied to the outstanding balance and will vary throughout the loan in intervals of five, seven or ten.

Fixed-rate mortgage

Is a fixed-rate mortgage right for you?

Pros

-Easy to understand

-Makes it easy to manage finances

-Payments remain the same regardless of the market

Cons

-They are the same for all lenders

-May cost more in interest throughout the loan

-Have to pay the same rate even if interest rates decrease

Adjustable-rate mortgage

Is an adjustable-rate mortgage right for you?

Pros

-A cheaper option for borrowers who plan to move in the foreseeable future

-Ability to take advantage of decreased rates without needing to refinance

-Low-interest rates in the early stages of the loan

Cons

-More difficult to understand than fixed-rate mortgages

-Rates are unpredictable throughout the loan

Which one is best for you?

Do you plan on staying in your home for several years? If so, a fixed-rate mortgage is probably the better option for you. It will provide you with a stable bill every month, and you will not have to worry about rising rates from unfavorable market conditions. Another important consideration when trying to decide between the two is the current state of interest rates. For instance, if the rates are on the higher side, Adjustable-rate mortgages can be an excellent option for a homeowner. This is because they allow borrowers to take advantage of lower interest rates in the early stages of the loan.

 

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