Adjustable Rate Mortgage or Fixed Rate Mortgage: Which Is Better?
09/14/2010 There are numerous types of mortgages, but by far the most common are the fixed rate mortgage and the adjustable rate mortgage. Which of these is best? This depends on your personal situation and your unique financial goals.
Adjustable rate mortgages come at a much lower initial interest rate than fixed rate mortgages for the first few years. After this initial period, the interest rate adjusts to match inflation. This can mean a decrease in your interest rate, but this rarely happens. Most of the time your interest rate will adjust upward. Your monthly payments may skyrocket.
Fixed rate mortgages come at a single, set rate for the entire length of the loan term. They are "standard" in this way. Your interest rate will never go up or down. However, as a result of this, interest rates on fixed rate mortgages are significantly higher than interest rates on adjustable rate mortgages.
When To Get An ARM
If you plan to refinance your mortgage or sell your home before the initial low-interest period is up, an ARM mortgage is likely a good choice. This will allow you to benefit from the initial low interest without the burden of higher payments in the future. An ARM can be helpful if you are a first time home buyer and can't pay as much starting out.
There is risk involved in this plan, however. If you are unable to refinance due to a decrease in home equity or you are unable to sell your home due to a poor market, you'll be stuck in a mortgage with unexpectedly high rates.
When To Get A FRM
If you plan to stick with a mortgage long term or are uncertain about the housing market, get a fixed rate mortgage. Anything else sets you up for failure. With the economy the way it is at current, fixed rate mortgages are likely the best choice for most borrowers. Nevertheless, be sure to compare mortgage rates and lenders to find the deal the meets your needs.
