Even though there are many people who argue both for and against fixed home equity loans, those who support there use will always win out when the credit market is tight. Adjustable rate mortgages are better suited for times of low interest rates and easy credit, since they take advantage of this situation.
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.
Since the payments are established based on a set interest rate and a total amount spread over a specified amount of time, there is only one variable that can be changed during a market fluctuationthe interest rate. The monthly payments will be changed to meet the new total due over the life of the loan, something that does not happen with 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
While it is true that fixed home equity loans tend to charge a higher interest rate than their adjustable counterparts, many people still find them fixed rate loans to be the better choice. If the prime interest rate goes down during the time you are paying off your loan, you may have lost some money. However, if the interest rates go up, you will have saved yourself a significant amount of money in the long run.
After watching friends and reading about many others who may have lost their homes due to an escalation in interest rates, adjustable rate loans are not quite as attractive to as many homeowners, especially those seeking a home equity loan.
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.
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