Fixed and Adjustable Rate Mortgages
UNDERSTANDING THE MOST COMMON KINDS OF HOME MORTGAGES
The Basics About Fixed and Adjustable Rate Mortgages
When selecting a loan, there is no right or wrong answer with regard to fixed or adjustable rate mortgages. It is a personal choice based on your tolerance for risk and the rise and fall of interest rates.
Fixed Rate Mortgages
These types of loans have one, unchanging interest rate and a single monthly payment for principal and interest during the entire loan term.
Pros: Consistent monthly payments and interest rate over the lifetime of the loan.
Cons: Typically higher interest rates than starting interest rates on adjustable rate mortgages.
Is It Right For You? Fixed rate mortgages usually suit individuals with a lower tolerance for risk. Also, if you're planning to keep the loan long-term, a fixed rate may fit your needs better since it ensures that your interest rate will not increase and your monthly payment will remain constant.
Adjustable Rate Mortgages (ARMs)
These types of loans are tied to fluctuating indexes, such as the LIBOR index.
Pros: Usually result in lower initial payments due to lower interest rates. If you believe that interest rates over the long run will be largely steady or will actually decline, then consider an ARM.
Cons: Your payments and interest rate will fluctuate. If you think rates may rise, then ARMs should be avoided.
Is It Right For You? ARMs typically suit individuals with a higher tolerance for risk looking for lower initial monthly payments. Also, ARMs often have an initial fixed rate period for three or five years, for example. In this case, an ARM may fit your needs better if you do not expect to keep the loan past the initial fixed period.
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