Fixed Rate Mortgages and Adjustable Rate Mortgages are the two most common mortgage rates. Following are the differences between the two mortgages:
Fixed Rate Mortgages allow a borrower to know what all future monthly payments will be. The interest rate is fixed; therefore, the borrower will pay the same monthly payment through the entire term of the Fixed Rate Mortgage. No matter what happens with interest rates, your payments won't change if using a Fixed Rate Mortgage.
There are two main types of Fixed Rate Mortgages: 30-Year and 15-Year. There are other types of Fixed Rate Mortgages (such as 10- or 20-Year), but they are not used as often as the 15-or 30 Year Mortgages.
With a Fixed Rate Mortgage, a borrower typically has a higher monthly payment than with some of the other mortgage choices because the Fixed Rate Mortgage keeps payments from increasing. A borrower is charged for this advantage.
Be sure to discuss your particular situation with a professional lender. You will typically find that Fixed Rate Mortgages are chosen if:
- Interest rates are low
- The payment for the house you want is affordable
- A borrower needs to budget for and predict monthly payments
- A borrower plans to keep the home for a fairly long period of time
To get the best Fixed Rate Mortgage, check with several lenders and ask for quotes. Also, ask your friends, co-workers, and real estate agent if they can refer a reputable lender.
When talking with your lender, ask for a written, explanation of any fees associated with the Fixed Rate Mortgage -- and why. Also, see if the lender will waive some of the fees, especially if you are a good borrower or if you're buying an expensive home.
An Adjustable Rate Mortgage (ARM) is a loan in which the interest rate is periodically adjusted, moving higher or lower in the same ratio as a preselected index, such as Treasury Bill rates. ARM loans may include caps on interest rate increases in a given time period, and over the life of the loan, and may include limits on the frequency of interest rate adjustments. ARM loans generally have initial below market interest rates in return for the borrower sharing the risk that interest rates may rise during the life of the loan.
ARMs often have their lowest, most attractive rates at the beginning of the loan, and can guarantee that rate for anywhere from a month to ten years. You may read about "3/1 ARMs" or "5/1 ARMs". That means that the beginning rate is set or fixed for three or five years, and then adjusts according to an index every year thereafter for the life of the loan. Loans like this are often best for people who anticipate selling their home within three to five years, depending on how long the lower rate will be in effect. With ARMs, a borrower does risk increases in the rate, but could also take advantage when rates go down by saving more money each month that would otherwise have gone toward the mortgage payment.