What's the Difference Between an Adjustable Rate and Fixed Rate Mortgage?
When the time comes to get a mortgage, many home buyers are faced with the question of whether they should get a fixed rate mortgage or an adjustable rate mortgage. Knowing the difference between these two mortgages can help the home owner determine which type of mortgage is right for them.
What's a Fixed Rate Mortgage?
A fixed rate mortgage is a standard mortgage with a fixed interest rate. The interest rate does not change over the life of the loan. Whether the mortgage lasts for 15 or 30 years, the homeowner will always make the same monthly payment until the loan has been paid off.
What are the Benefits of a Fixed Rate Mortgage?
For many homeowners, the major benefit of a fixed rate mortgage is the predictability of the payments. Homeowners who want to save for the future and budget for various life events may find this easier to do with a fixed rate mortgage, because the payment amount stays the same for years. Many homeowners enjoy a feeling of security having a fixed rate mortgage. Whereas other mortgages have changeable payments that could go up or down at almost any time, fixed rate mortgages do not.
In addition, fixed rate mortgages make it easier for home buyers to compare one mortgage to another. Because the payment will always be the same, the homeowner need only look at the total amount he or she will pay for each loan to determine what is the cheapest option.
What are the Disadvantages of a Fixed Rate Mortgage?
Payments for a fixed rate mortgage will not go down, even if interest rates go down. The only way for a home buyer to take advantage of a decreasing interest rate is for the buyer to refinance the loan. This can be a time consuming process.
What's an Adjustable Rate Mortgage?
An adjustable rate mortgage (ARM) is a mortgage with an interest rate that can change over time. Adjustable rate mortgages often start off with a low interest rate, but over time, the interest rate may change. Interest rates on adjustable rate mortgages change according to an index. When the index changes, so does the amount that the homeowner must pay.
Adjustable rate mortgages often go up, but some can also go down. As long as the terms of the mortgage agreement specify that the payment may go down with falling interest rates, then the home buyer may see their monthly payments decrease with time.
What Are the Benefits of an Adjustable Rate Mortgage?
Often, adjustable rate mortgages start off with a lower interest rate than fixed rate mortgages. The monthly payment for the mortgage is factored into the homeowner's debt to income ratio (DTI) when the home buyer is applying for the mortgage.
Higher mortgage payments bump up the homeowner's DTI, which can in turn limit how much the buyer can borrow. To leverage the most buying power possible, a buyer who wants to purchase a more expensive house may want an adjustable rate mortgage. In addition, there are times when adjustable rate mortgages go down. Whereas a borrower with a fixed interest rate must refinance in order to take advantage of decrease in interest rates, borrowers with adjustable rate mortgages do not have this experience.
If You Want to Get an Adjustable Rate Mortgage, What Should You Do to Protect Yourself?
Homeowners who want to get an adjustable rate mortgage must first work with their lender to ensure that the terms of the loan are acceptable. For example, homeowners should find out how high their monthly payments can go over the life of the loan, how often the loan prices may raise, and by how much each time.
Many adjustable rate mortgages are fixed for a couple years, and will not start to go up until a certain amount of time has passed. Queensridge homeowners who are signing for an adjustable rate mortgage should know how long the rate is fixed until it may begin to rise. There may also be a limit on how low the payments and interest rate could go; homeowners must be aware of this as well. Homeowners who are aware of all of these factors may find it easier to make a decision when the time comes.
Which One Is Better?
Both types of mortgages have advantages and disadvantages. Home buyers who would like to purchase a home should not rule out either type of mortgage without understanding the terms of both types of mortgages.
For more information about which type of mortgage is right for you, contact your mortgage lender. Your lender can help you decide between these two popular types of mortgages.