Fixed Rate Mortgage vs. Adjustable Rate Mortgage
When you are purchasing a home, one of the first decisions you will be faced with is choosing the type of mortgage that is right for you. There are two major mortgage loan types to choose between – fixed rate mortgage and adjustable rate mortgage. Each has their benefits, but it is important to choose the one that works best for you and your financial situation.
Fixed Rate Mortgage
With a fixed rate mortgage, the interest rate remains the same for the duration of the loan. The interest rate on this loan is set when you take out the loan and will not change, regardless of how interest rates change in the marketplace.
Pros:
- Locks in your best interest rate for the term of the loan.
- Your month payment remains the same even if your principal and interest rates change.
- The initial loan payments are applied to your interest and less to the principal, this reverses over time.
Cons:
- Principal and interest payments are usually higher than most adjustable rate mortgages, at least in the first couple years.
- If you want to take advantage of an interest rate decrease, you would have to refinance.
Who would this type of mortgage loan be the right fit for? People who preferred to have the same principle and interest payments that do not increase if interest rates rise. Also those are planning to stay in their home for 10 or more years.
Adjustable Rate Mortgage (ARM)
The interest rate on adjustable rate mortgages can go up or down, as it explains in the name. Typically, ARMs will have a lower rate to begin with than fixed rate mortgages. However, after this introductory period ends, your interest rate unlocks and adjusts periodically based on outside index. Therefore your monthly rate may increase and […]