10/22/2010 Home purchase mortgage loans come in two broad categories. Your mortgage either has an adjustable interest rate or a fixed interest rate. An adjustable interest rate may fluctuate up or down over time depending on current market rates. A fixed rate mortgage always remains the same.
If these were the only two differences, making the decision between an adjustable rate or fixed rate mortgage would be simple. You could simply decide whether you want to take the risk of your rate increasing in exchange for the possible benefit of it decreasing, or whether you wanted to get a set rate that would never change. Most homebuyers would likely select the second option for the sake of financial security.
But there are additional factors to consider. The largest additional difference is that adjustable rate mortgages start out with lower rates than fixed rate mortgages. This can make them extremely attractive to many individuals, especially first time home buyers. Also, adjustable rate mortgages don't begin to adjust right away. They remain fixed at the initial low rate for a period of several years. This can make them highly advantageous to certain homebuyers, but only under specific circumstances.
• If you plan to refinance your mortgage before the fixed period ends, an adjustable rate mortgage can be beneficial. You'll be able to take advantage of the lowest mortgage rates available. However, if your home decreases in value or you aren't able to build up enough equity to refinance, you may find yourself stuck with a high rate when your current mortgage adjusts.
• If you plan to sell your home before the fixed period ends, an adjustable rate mortgage can be useful. This can be particularly helpful for investors who plan to flip a home or manage a property for only a short period of time. However, some homes take months and even years to sell. Be careful.
Under any other circumstances, an adjustable rate mortgage will likely cause you more trouble than it's worth. In the long run, you're more likely to save money with a fixed rate mortgage.
