Questions on Fixed & Adjustable Rate Mortgages

Q: Aren't there really just two kinds of mortgages: fixed and adjustable rate?

A: You could say that, because all mortgages fall into one of these two categories -- that is, the interest rate you pay is either the same (fixed) for the life of the mortgage, or it can change (adjust) over the life of the mortgage.

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Fixed-Rate Mortgages

With this type of mortgage your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable. Fixed-rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also "bi-weekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)

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Adjustable-Rate Mortgages (ARMS)

These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home. However, the interest rate changes at specified intervals ( for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.

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Q: How do I know which type of mortgage is best for me?

A: There isn't a single, simple answer to this question. The right type of mortgage for you depends on many different factors:

  • Your current financial picture
  • How you expect your finances to change
  • How long you intend to keep your house
  • And how comfortable you are with your mortgage payment changing from time to time

For example, a 15-year fixed-rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. And an adjustable rate mortgage may get you started with a lower monthly payment than a fixed-rate mortgage -- but your payments could get higher when the interest rate changes.

The best way to find the "right" answer is to contact Alliance Mortgage and discuss your finances, your plans and financial prospects, and your preferences.

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Q: How much will my credit history affect my ability to get a mortgage?

A: Many home buyers are very worried about this issue. Most people don't need to worry about the effects of their credit history. However, you can be better prepared if you get a copy of your credit report to review before you apply for your mortgage. That way, if there are any errors you can take steps to correct them before you make your application. If you have had credit problems, be prepared to discuss them honestly with us -- and come to your application meeting with a written explanation. We know that there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. If you had a problem that's been corrected, and your payments have been on time for a year or more, your credit will probably be considered satisfactory.

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Still have questions? Contact Alliance Mortgage