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
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