Fixed vs. Adjustable Mortgages

After spending numerous weekends at open houses, you have found the house of your dreams. Now, you could spend just as much time searching for a mortgage. Most mortgages however, can be narrowed down to two types: fixed-rate and adjustable-rate.

And relying upon your personality type, conservative (Fixed-rate) versus risk-taker (ARM), you may be able to more quickly decide with which plan to go. In most cases, however, this decision will require more investigation prior to making such an important commitment.

Fixed-rate mortgages are the most common loans selected by homebuyers. The principal and interest payment on a fixed-rate mortgage will remain constant over the life of the home. Generally speaking, the rule of thumb with the fixed-rate mortgage is the shorter the term, the lower the interest rate.

Adjustable-rate mortgages (ARMs) have interest rates and monthly payments that change with the economy. As market rates rise or fall, so will your rate and payment. However, typically there are caps that will limit the total rate increased to typically two percent a year.

ARMs are available with adjustable periods of six months, one year, three years or five years. Fir instance, if you have a three-year ARM, your interest rate and monthly payment can change every three years.

Fixed mortgages are a good choice if interest rates are low or are expected to rise. With a fixed mortgage rate, you know that your interest rate will never change. If the interest rate drops, you can always refinance. If you are on a fixed budget, a fixed-rate loan is a wise choice because you will always know your mortgage rate.

Adjustable-rate mortgages may come with initial interest rates of one to two points lower than fixed-rate mortgages, which make them a good choice if interest rates are high or if the home buyers only plan on staying in the home for a short amount of time.

If you are stretching your budget by purchasing an expensive home, the lower rate of an ARM may make it easier to qualify for a larger loan