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Trying to find the right mortgage can be a daunting task. One of the most important things for you to decide is whether a mortgage with a fixed rate or one with an adjustable rate is better for you.
Fixed Rate Mortgages
With a fixed rate mortgage, the interest rate is set for the entire term of the loan. The pros of a fixed loan are that your future monthly payments are easy to project and it provides stability if you plan to be in your home for a long time.
And, if interest rates rise, yours remains the same. On the other hand, if interest rates drops, your rate still remains the same unless you refinance your home at a lower rate.
Adjustable Rate Mortgages
The interest rate on an adjustable rate mortgage (ARM) may be adjusted periodically, usually in response to changes in the Treasury Bill or the London Inter Bank Offering Rate (LIBOR). The interest rate is fixed for a certain period of time (the adjustment period) and they varies depending on market rates.
One of the pluses of having an ARM is that you have lower initial payments. It’s also an ideal type of mortgage if you plan to own a home for a short time. An ARM also has a fixed rate during the adjustment period.
Another advantage to taking out an ARM is if interest rates fall, your rate falls, too. You may also qualify for a larger loan.
On the other hand, an ARM may not be the loan for you if you’re looking for long-term stability. After the adjustment period, interest rates typically rise.
When rates are low, an ARM may be the ideal choice if you know you won't be living in your home for a long time. However, a fixed rate mortgage can offer stability and long-term benefits that add up over the years. So think carefully and consider how long you plan to live in your home while deciding which rate to choose. |
