How to Compare Fixed Rate Mortgages and Adjustable Rate Mortgages
By: Chileshe Mwape | Posted: 08th September 2005
How to Compare Fixed Rate Mortgages and Adjustable Rate Mortgages
There are many types of mortgages, and the more you know about them
before you start, the better. To compare one Adjustable Rate
Mortgage with another or with a fixed-rate mortgage, you need to
know about indexes, margins, discounts, caps, negative amortization,
and convertibility. You need to consider the maximum amount your
monthly payment could increase. Most important, you need to compare
what might happen to your mortgage costs with your future ability to
pay.
FIXED RATE MORTGAGES
In a fixed-rate mortgage, your interest rate stays the same for the
term of the mortgage. The main advantage of a fixed-rate mortgage is
that you always know exactly how much your mortgage payment will be,
and you can plan for it.
Benefits and Advantages:
- Low rates for the full term of your mortgage
- Security of a fixed monthly payment for the life of you loan,
regardless of fluctuations in interest rates
- More stability may give you peace-of-mind
Disadvantages
- Higher initial monthly payments compared to those of adjustable
rate mortgages
- Less flexibility
ADJUSTABLE RATE MORTGAGE (ARM).
With this kind of mortgage, your interest rate and monthly payments
usually start lower than a fixed-rate mortgage. But your rate and
payment can change either up or down, as often as once or twice a
year. The adjustment is tied to a financial index. Throughout the
life of that loan, the principal and interest payment will adjust
periodically based on fluctuations in the interest rate.
Benefits and advantages:
- Lower Initial payments due to lower beginning interest rate
- Ability to qualify for a higher loan amount due to lower initial
interest rates
- Lower interest payments if the interest rate drops over time
- Interest rate caps limit the maximum interest payment allowed for
the loan
Disadvantages
- Your future monthly payment is uncertain.
- Initial lower interest rate and monthly payments are temporary and
apply to the first adjustment period. Usually, the interest rate
will rise after the initial adjustment period.
- Higher interest payments if the interest rate rises over time
SUMMARY
A Fixed Rate mortgage will offer you the security of knowing that
your mortgage interest rate will not change during the term of your
fixed rate. The advantage of an Adjustable Rate Mortgage is that you
may be able to afford a more expensive home because your initial
interest rate will be lower. A Fixed-Rate Mortgage applies the same
interest rate toward monthly loan payments for the life of the loan.
Fixed-rate mortgages are more straightforward and easier to
understand than ARMs. They are more secure for the buyer and they
are very popular with first-time home buyers. Since the risk to the
lender is higher, fixed-rate mortgages generally have higher
interest rates than ARMs. A fixed rate mortgage is ideal for anyone
who likes to budget monthly expenses and plans to keep their home
for several years.
A more detailed version of this article including a glossary of
terms is available at: http://www.us-banks.org/archives/1970
[Disclaimer: This article is provided for information purposes only.
No warranty is either expressed or implied. Under no circumstance
will the author be liable for any loss or damage caused by a user's
reliance on this information.]
Copyright © 2005. Chileshe Mwape writes for The US Banks Guide:
http://www.us-banks.org/ Find informative articles and news stories
about banking and finance. This article may be reprinted as long as
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About the Author
Occupation: webmaster
Chileshe Mwape also writes for The Pregnancy Guide website and he
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