| There are many ways to structure home loan rates, | | | | picture. The ARM or adjustable rate mortgage was |
| but the two most common type of loan structures are | | | | created at a time when fixed mortgage rates were |
| the Fixed Rate Mortgage and the Adjustable Rate | | | | high. The ARM allowed initial interest rates to be set |
| Mortgage. The type of mortgage rate that you | | | | lower than the prevailing fixed rates and to be |
| choose will depend upon your own situation. The | | | | adjusted upward according to a predetermined |
| interest rate is the amount the loan costs you over | | | | formula in the future. For example, the ARM might be |
| time and varies according to the initial rate set or | | | | set with the rate two points lower than the fixed |
| according to the changes in the index rate applied to | | | | mortgage rates at the time with the provision that |
| your loan. The fixed rate loan will carry the same | | | | after two years, the rate would be adjusted in |
| interest rate throughout the life of the loan, while the | | | | accordance with a predetermined index in the future. |
| ARM changes according to a predetermined index | | | | More borrowers could qualify to obtain the loan, while |
| rate. | | | | the lenders didn't have increased risk so long as the |
| Definitions | | | | interest rates or index were increasing. |
| There are two major types of mortgage loans. Home | | | | Fixed Rate Advantages and Disadvantages |
| loan rate that is set at the beginning of the loan and | | | | Fixed rates are often set slightly higher than ARMs in |
| doesn't change during the course of the loan is known | | | | order to lock in a loan rate when rates are rising so |
| as a fixed rate loan, for obvious reasons. The loan | | | | that the lender doesn't lose money on the opportunity |
| rate is often based on what the economy is doing at | | | | to lend money at higher interest rates. At the same |
| the time. Lenders want to protect themselves if there | | | | time, with a fixed rate, if the rates are falling, the lender |
| is an indication that loan rates may change drastically | | | | has the older fixed rate loans that are bringing more |
| during the course of the loan. | | | | interest money than the current loan. Fixed rate type |
| The adjustable rate mortgage is flexible and helps to | | | | home loan rates packages are believed to be more |
| protect the lender in situations where the interest rates | | | | favorable to the borrower than the lender. |
| are rising over a period of time. If the increased in | | | | Another advantage of the fixed rate loan is structure. |
| rates reach a certain level, the lender is allowed to | | | | You can not be priced out of your home by |
| adjust the interest rate and thus the payment amount | | | | increasingly painful mortgage rate adjustments with |
| upward for the balance of the loan term | | | | corresponding payment amount adjustments. This |
| ARM Advantages and Disadvantages | | | | makes it easier to budget and to plan your |
| The ARM is relatively new on the home loan rates | | | | expenditures over a longer period of time. |