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Fixed Rate Mortgage In a fixed rate mortgage, the monthly interest rate stays the same for a certain amount of time. This grace period usually lasts from between two to five years. At the end of this fixed rate period the interest rate is turned into a variable rate. The intrinsic feature of a fixed rate mortgage is that the interest rate will remain the same month after month even if intrest rates rise. The disadvantage of this type of mortgage is that, if intrest rates fall (which would result in lower monthly payments), the home owner would still be required to pay the monthly payment computed with a higher interest rate. Adjustable Rate Mortgage An adjustable rate morgage means that the interest rate would not be stuck at a certain level but rather would reflect the true movements of the market. The adjustable rate here could refer to either the standard variable rate or the rates that reflect the external rate. The biggest advantage of having an adjustable rate mortgage is that the monthly payments that a home owner needs to pay, since it is truly reflective of market conditions, would rise or fall depending on the prevailing rates and the market conditions. If the indicators drive the mortgage rates down then the subsequent lower rates would translate to lower monthly payments. The disadvantage here is that if the interest rates rise and continues to do so then the home owner will have no protection but instead will have to contend with rising monthly payments. Factors that affect the Mortgage Rate A number of factors affect the fluctuating value of a mortgage rate among these are: 1. The capital market - depending on investor demands for certain types of investment instruments the market yields would either move up or down. If the demand falls low enough then in order to attract investors interest rates would be raised in order to increase profits for investors. 2. Inflation also plays a role in determining the value of the interest rates because it also affects the value of investments.
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