Deciding Between a Fixed or Adjustable Rate Mortgage

When you decide to purchase a home and to apply for a mortgage loan, you will have to make a number of decisions. One of the decisions you will have to make is whether you want to have a fixed rate mortgage or an adjustable rate mortgage.

The fixed rate mortgage and the adjustable rate mortgage both have their benefits and their drawbacks. For example, a fixed rate mortgage guarantees that your monthly mortgage payment will be the same for the life of your loan. Therefore, a fixed rate mortgage makes budgeting simple – you always know what you will have to pay.

An adjustable rate mortgage is different from a fixed rate mortgage in that the interest rate applied to your loan may change during the life of your loan. As a result, your monthly payments may change as well. This type of loan makes budgeting a bit more difficult since your payments will not be the same every month. On the other hand, depending on market fluctuations, you might save money on interest payments if you choose to have an adjustable rate mortgage.

Often, an adjustable rate mortgage loan starts off with an interest rate that is lower than what you would get if you had a fixed rate mortgage. In most cases, the rate increases over time until it is about the same as the fixed rate mortgage.

When considering an adjustable rate mortgage, it is important to look at the type of adjustable rate mortgage you are applying for. The most common of these mortgages are 1/1, 3/1, 5/1, 7/1, and 10/1. These numbers indicate how many years your loan will be fixed before the lender begins adjusting the rate based on market changes.