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Fixed-rate Or Arm - What Are The Advantages?

Submitted by Wilhelmina Mungera | RSS Feed | Add Comment | Bookmark Me!

All mortgages tend to fall into one or two basic categories - they are either a fixed rate mortgage or an adjustable rate mortgage. Among these two categories, however, there are many different options that allow you to get a mortgage that suits your personal needs. Here are some of the advantages of these two basic types that you need to know if you are considering buying a house.

A fixed rate mortgage gives you the predictable leverage of knowing that your payments and rate of interest stay the same throughout the length of the mortgage. There are no changes or adjustments of any kind during the term of the mortgage. The obvious advantage occurs when the interest rates, driven by the economy, changes for the worst. Since you are locked in to your rates, you will not be effected. On the other hand, a fixed rate mortgage may backfire, if the interest rates do drop during economic boom times. This could easily leave you paying much higher rates than others.

The advantage of fixed rate mortgages is obviously the stability it provides - you always know what your payment will be. There are a number of options that will give you greater or lower payments, though, such as the longevity of the mortgage. You can choose from 15-year mortgages, and then at various intervals, all the way now up to 50 year mortgages. The longer the loan, of course, the higher the amount of interest that you will pay throughout the term of the mortgage.

An adjustable rate mortgage, provides you with certain advantages that depend on both your own circumstances, as well as the economy. Most adjustable rate mortgages have a fixed rate portion of the loan, which typically, comes in 1,3,5,7, or 11 years. This portion of the loan allows you to enjoy a fixed rate for that period of time that you choose. This can be really good if the economy is doing well and the rates are low. It is this feature that could also allow you to get a larger house than you might be able to afford if you went for a fixed rate mortgage.

Adjustable rate mortgages lock you in, for a few years to the rate at the time you bought the house. Usually this means that you have a lower rate than anyone who buys a fixed rate mortgage at the same time. At the end of the fixed rate portion, though, you will see an adjustment made that will reflect the market - whether it is good or bad. This means that you could see quite a large jump all of a sudden. It could be hundreds of dollars more - or it could even be less than what you were paying earlier - if the market is that good. An adjustable rate mortgage will usually have some limits on the amount of an increase there can be in any year. This increase, however, is one of many. Depending on your contract, it could mean that your adjustments are made on either a monthly or yearly basis.

In either case, there are pros and cons - all depending on the economy. The good thing is that there is always the possibility of refinancing - if need be. Be sure to compare any offers you receive in order to determine the best buy for your situation. Get several offers from different companies in order to see the possibilities, and you may want to get some advice from outside sources as to whether a fixed rate or adjustable rate is the best for you.


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