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How to Compare Fixed Rate Mortgages and Adjustable Rate
Mortgages
There are many types of mortgages, and the more you know about
them before you start, the better. To compare one Adjustable Rate
Mortgage with another or with a fixed-rate mortgage, you need to
know about indexes, margins, discounts, caps, negative
amortization, and convertibility. You need to consider the
maximum amount your monthly payment could increase. Most
important, you need to compare what might happen to your mortgage
costs with your future ability to pay.
FIXED RATE MORTGAGES
In a fixed-rate mortgage, your interest rate stays the same
for the term of the mortgage. The main advantage of a fixed-rate
mortgage is that you always know exactly how much your mortgage
payment will be, and you can plan for it.
Benefits and Advantages:
- Low rates for the full term of your mortgage
- Security of a fixed monthly payment for the life of you
loan, regardless of fluctuations in interest rates
- More stability may give you peace-of-mind
Disadvantages
- Higher initial monthly payments compared to those of
adjustable rate mortgages
- Less flexibility
ADJUSTABLE RATE MORTGAGE (ARM).
With this kind of mortgage, your interest rate and monthly
payments usually start lower than a fixed-rate mortgage. But your
rate and payment can change either up or down, as often as once
or twice a year. The adjustment is tied to a financial index.
Throughout the life of that loan, the principal and interest
payment will adjust periodically based on fluctuations in the
interest rate.
Benefits and advantages:
- Lower Initial payments due to lower beginning interest
rate
- Ability to qualify for a higher loan amount due to lower
initial interest rates
- Lower interest payments if the interest rate drops over
time
- Interest rate caps limit the maximum interest payment
allowed for the loan
Disadvantages
- Your future monthly payment is uncertain.
- Initial lower interest rate and monthly payments are
temporary and apply to the first adjustment period. Usually, the
interest rate will rise after the initial adjustment period.
- Higher interest payments if the interest rate rises over
time
SUMMARY
A Fixed Rate mortgage will offer you the security of knowing
that your mortgage interest rate will not change during the term
of your fixed rate. The advantage of an Adjustable Rate Mortgage
is that you may be able to afford a more expensive home because
your initial interest rate will be lower. A Fixed-Rate Mortgage
applies the same interest rate toward monthly loan payments for
the life of the loan. Fixed-rate mortgages are more
straightforward and easier to understand than ARMs. They are more
secure for the buyer and they are very popular with first-time
home buyers. Since the risk to the lender is higher, fixed-rate
mortgages generally have higher interest rates than ARMs. A fixed
rate mortgage is ideal for anyone who likes to budget monthly
expenses and plans to keep their home for several years.
A more detailed version of this article including a glossary
of terms is available at: http://www.us-banks.org/archives/1970
[Disclaimer: This article is provided for information purposes
only. No warranty is either expressed or implied. Under no
circumstance will the author be liable for any loss or damage
caused by a user's reliance on this information.]
Copyright © 2005. Chileshe Mwape writes for The US Banks Guide:
http://www.us-banks.org/. Find
informative articles and news stories about banking and
finance.
This article may be reprinted as long as all the above links
are active and clickable.
 MORE RESOURCES updated Thu. February / 09 / 2012
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