There are arguments both for an against taking out a fixed home equity loan, but in a tight credit market, the proponents for the fixed rate win every time. During time of easy credit and low rates, many people took advantage of adjustable rate mortgages, allowing them to purchase a home based on a low interest rate.
If that rate stays about the same, then there is no problem. Problems do begin to arise, though, when the prime interest rate starts going up and that adjustable rate mortgage is now adjusting itself in the wrong direction. This makes payments on a home loan higher.
When the market’s situation experiences a change, this also affects the payments on such loans because they are calculated from a set interest rate and the total amount of money to be paid is spread over a specific amount of time. The interest rate is locked in and payments remain the same during the entire course of a fixed home equity loan.
Monthly payments can increase quite dramatically even if the interest rate only changes slightly with an adjustable rate mortgage. The fact that this variable is open to change and is so easily affected by fluctuations in the market can be quite stressful for families struggling to pay their loans.
Fixed Rates Prevent Adverse Changes
Although the interest rates commanded by a fixed home equity loan may be higher than that offered with adjustable rates, it is a gamble that many homeowners are willing to take. If the rates go up they win, because the cost of their loan is fixed, unaffected by the rate variation. If the rates fall, then they will spend more money for their loan than had they used an adjustable rate, but it is a chance most are willing to take.
Adjustable rate loans do not seem quite so appealing to individuals who are interested in taking out a home equity loan when they consider the people who have lost their homes because of an unexpected increase in interest rates.
Payments on a home equity loan can reach such an incredibly high level that an individual may have their home taken from them by default, and this is even more likely if the person’s primary mortgage is also on a fixed rate.
Author: Michael GeoffreyThis author has published 6 articles so far.