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Fixed vs. adjustable rate mortgages in Illinois

In 2013, the average person in Illinois and across the country spent $17,148 annually on housing expenses. According to the U.S. Bureau of Labor Statistics, $10,080 of that was for shelter alone. That is a considerable amount of money, which is why it is understandable that people in the market for a new home are looking to get the best possible deal. One way to do that is to compare options for the mortgage.

There are two main types of mortgage loans: fixed rate and adjustable rate. A fixed rate mortgage is exactly what it sounds like: the interest rate established at the time the loan is closed is what it will be for the life of the loan, as long as the homeowner does not refinance.

An adjustable rate mortgage, or ARM, features a fluctuating rate. While it is possible for the rate to go down, the Consumer Financial Protection Bureau reports that after the introductory period, the rate likely will rise and so will the monthly mortgage payment. There are some advantages to an ARM, such as having a lower initial interest rate than most fixed loans feature, which results in a lower monthly payment.

However, as the CFPB points out, anyone considering an ARM should consider the following: 

  •        Are there caps on either how high or how low the interest rates will be?
  •        If the payment reaches the maximum caps, is the loan still affordable?
  •        When will the rates be adjusted?

One of the issues with an ARM is that its terms can seem confusing, which can lead a homebuyer into agreeing to a loan that is outside his or her budget. Experts recommend working with a trusted professional to determine which kind of mortgage is best for the consumer’s financial future.

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