Adjustable-rate and fixed-rate home loans are two of the most commonly used types of home loans. These loans are known for their varying interest rates and payment options, which make them highly sought-after among homeowners. For those with a plan of purchasing a home soon, it is crucial to understand the difference between these two types of home loans before making a decision.
Fixed-rate home loans and adjustable-rate home loans, as the names suggest, differ in a significant way- their interest rates. A fixed-rate home loan maintains the same interest rate throughout the loan term, while an adjustable-rate home loan’s interest rate fluctuates throughout the loan tenure.
Fixed-Rate Home Loans
When availing of a fixed-rate home loan, the borrower and lender agree on a fixed interest rate, which does not change throughout the loan tenure. The borrower has to pay a fixed amount every month during the loan term. Fixed-rate mortgages are preferred by those looking for consistency in payments and the security of a constant interest rate.
One of the most significant advantages of a fixed-rate home loan is that it provides borrowers with a fixed payment schedule, which allows them to plan for future expenses accordingly. Borrowers can easily map out their monthly payments and expenses to adjust their budget accordingly. Furthermore, fixed-rate home loans are incredibly popular when home loan rates are low. Borrowers looking to lock in a low housing loan interest rate for an extended period can opt for a fixed-rate home loan as it protects them from interest rate fluctuations that may result in higher mortgage payments every month.
Choosing the Right Home Loan
When deciding between the two types of home loans, borrowers must weigh their options and assess their financial situation to determine what works best for them. Borrowers must consider factors such as:
Home loan interest: The borrower should evaluate the interest rates offered by the lender and compare them to other lenders to ensure that they are being offered the best rates. This will help in ensuring that they pay lesser interest on their home loan.
Home Loan eligibility: To be eligible, borrowers have to check their credit score, source of income, and any other loans that they may have. Understanding eligibility can help narrow down choices, and homebuyers can choose the right loan type.
Housing Loan tenure: The loan’s tenure is the period during which the borrower repays the loan. Tenure plays a significant role in a borrower’s monthly payments and the interest they pay. A longer tenure increases interest payments and the amount borrowed.
Adjustable-Rate Home Loans
Adjustable-rate home loans (ARMs), on the other hand, offer varying interest rates throughout the loan tenure. The interest rate is linked to an index, and the borrower’s interest rate fluctuates based on changes in the index value. ARMs allow borrowers to take advantage of low-interest rates as compared to fixed-rate home loans. In the initial period of the home loan application, ARMs offer lower interest rates compared to fixed-rate home loans, but the loan’s interest rate can increase or decrease throughout the loan period, depending on the index value’s fluctuations.
Adjustable-rate home loans are a good option for borrowers who are willing to take some risk regarding their mortgage payment. Those who expect their income to increase or plan to sell the home soon may opt for ARMs. ARMs offer flexibility in their payment options. They have adjustable payment schedules where borrowers can select from a range of options depending on the interest rate. Homeowners enjoy lower payments during the loan’s initial period by choosing the minimum payment option.
In conclusion, both adjustable-rate and fixed-rate home loans have their advantages and disadvantages. Choosing between them depends on the borrower’s financial situation, future plans, and the housing loan terms offered by the lender. Borrowers should carefully evaluate their options before settling for a particular home loan type.