If you’re looking to finally buy your first home, odds are you’ve been doing a lot of research and you’ve run across the terms fixed and adjustable-rate mortgage several times. So, what are they and which do you want?
Basically, fixed rates are the more conservative, bow-tie types of the mortgage world. A fixed rate stays stodgily in place through interest peak upticks and downswings. The good news is you always know what you will pay and you can plan accordingly. The fixed rate is particularly good for long-term, 20-30 year mortgages.
In contrast, the adjustable-rate mortgage is more of a free-wheeling go with the flow type of mortgage guy. These ARMS as they’re called aren’t entirely giddy, however, most have an initial fixed rate, stodgy, period of perhaps 5-7 years. After that, the rate may or may not rise, but it will be adjusted from year to year after the fixed rate period. It’s a bit of a gamble. Your new rate could prove to be a huge strain on your budget. Before considering an ARM get a disclosure letter from your lender, ensuring the max rate you will have to pay once the loan graduates out of its fixed rate status. If its too much stay away.
If an ARM seems not at all enticing, consider this. The initial fixed rate on an ARM is apt to be lower than that of a straight up fixed rate mortgage. So, if you can chow down on the possible big rate increases down the road you may want to go for it, particularly if you plan on moving in a matter of a few years.
- Fixed rate mortgages stay the same rate for the life of the loan, which is often several decades.
- Adjustable-rate mortgages, or ARMs, do not stay fixed over the life of the loan, but they often have a short fixed period of several years before they become entirely adjustable.
- During the period of time in which an ARM is fixed, which is usually an initial 5-7 years, the rate is often lower than conventional fixed rate mortgages.
“Most people choose the fixed-rate mortgage without even thinking about it, but there are situations where an adjustable-rate mortgage may be a better fit.”