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Get the right home loan for you—Fixed vs. Adjustable Rate Mortgages

Purchasing a home will most likely be one of the biggest financial transactions you will make. Therefore, it is important for you to understand what kind of options you have when looking to purchase your new home. There are two primary types of home loans in today's market—fixed rate mortgages and adjustable rate mortgages (ARMs).

Fixed rate mortgages have an interest rate that is set for the entire duration of the loan. One of the advantages of a fixed rate mortgage is the protection from rising interest rates. You also know exactly how much your payments will be, which helps with budgeting. Among the most popular mortgages are 30-year fixed rate mortgages because they offer the lowest payments. However, the overall cost on fixed rate mortgages are higher because of the length of the term, and most of your early payments are going toward interest.

With an adjustable rate mortgage, the interest rate usually starts lower than a fixed rate mortgage. The period of the fixed rate can range anywhere from one month to 10 years. Adjustable rate mortgages can be a good choice for borrowers who do not plan on staying in a home for an extended period of time because they usually offer lower payments. However, they are more complex and it is important for you to understand the terms of the loan because of the indexes, margins, caps and ceilings that affect your monthly payment once your mortgage adjusts.

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