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Fixed vs Adjustable Rate Loans
By Brandon | Last edited: June 14, 2008
Almost every homeowner, at one point or another, will be looking into the possibility of pulling out a mortgage on their home. When doing so, they are faced with two general propositions: a fixed rate mortgage and a variable rate mortgage. These two forms of mortgages are very different and can benefit different people in different ways all depending on the situation, especially the current interest rate levels. Both have advantages and disadvantages that must be weighed carefully.
Fixed rate mortgages (FRM) are mortgages that, as the name implies, will have one steady interest rate over the entire mortgage term. This interest rate will never change and never vary. You, as the homeowner getting the mortgage, will not have to worry about sudden market changes affecting how much you will be paying a month and how much interest is charged. This is all set beforehand. Fixed rate mortgages are determined by the prime rate of interest at the time and by measuring your own credit scores and other variables into the mix.
Adjustable rate mortgages (ARM) are more of a risk. They start out at a lower rate than FRM and can prove to be very cost effective or they can lead to much higher interest rates in the long run. You see, while adjustable rate mortgages start out lower, they are also affected by changes in the interest rate levels at any given time. If interest goes up, your rate will follow suit. Basically, when considering an ARM, you must consider what the current market is like for interest rates. If the current market is high, it might be better to go with adjustable, have a lower initial interest rate, and then have lower interest rates in the long run as interest rates fall. However, if you get an adjustable rate mortgage and a time when interest rates are low you will end up seeing significant increases in your interest rate in the long run.
As can be seen, each form of mortgages has their own uses and sets of plusses and minuses. When considering a mortgage against your house it is extremely important to evaluate your own situation carefully and also the current market situation. Look into what the long run interest payments are going to be for each method and choose between fixed vs adjustable rate mortgages based on what is right for you and what will save you money in the long run.
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