Adjustable versus Fixed Rate Mortgages

Mortgages are the way we finance our dream home.  Most people make a decision between a fixed rate and an adjustable rate mortgage of some sort.  Before choosing one over the other, learn the advantages and disadvantages of both.

o Adjustable rate Mortgages

These mortgages offer a homeowner the advantage of a fixed rate for a specific period.  This option works well for mortgage holders who do not have A+ credit and don’t qualify for a fixed rate mortgage.  They can still budget for a mortgage payment that is the same each month, at least for a certain time.  Adjustable rate mortgages can adjust after one, three, or five years.  If you can get a five-year adjustable, that is a good deal. 

Interest rates can be low when securing the loan, which is even better.  This is good news for borrowers who will sell their home in five years.  They reap the benefits of a fixed rate mortgage without having one.  The rate on this type of mortgage adjusts with the market.  A homeowner could have the luck of having an interest rate that falls when it is time to adjust.  Lower mortgage rates can be taken advantage of without the hassle of going through a refinancing.

However, adjustable rate mortgages can become a burden as well.  When the rate does adjust, the jump in the monthly payment can be one that the owner did not anticipate.  Your payment can increase a couple of hundred dollars from one month to the next.

After the fixed period is over, the loan can rise as much as six percent from then on.  No one would want a loan payment with 12% interest.  Monthly payments would go through the roof.  On a 30-year mortgage, there would be no end in sight unless you refinanced the loan.

o Fixed Rate Mortgages

This is the type of mortgage that you want if you can get it.  A fixed rate mortgage means the payment will remain the same for the life of the loan.  In a good market, an interest rate of 5.5% is great.  Even if the rates go up over the years, you don’t have to worry about it.  You are secure in that 5.5% you had in the beginning.  The stability is what most homeowners want.  Even if finances change, the mortgage payment will not. 

Fixed rate mortgages also have a downside, however.  If you catch the interest rate when the market is not favorable, you could be locked into an 8% mortgage rate for the life of the loan.  In this instance, the fixed rate mortgage can be an expensive option.  To catch a lower interest rate, the homeowner would have to refinance.  Refinancing involves another closing, closing costs, and going through the same process that you went through the first time.  It can be time-consuming.

Mortgages are tricky things.  Do as much research as you can on adjustable and fixed rate mortgages before approaching a lender.