Deciding whether or not to finance your home using an adjustable versus a fixed rate mortgage is a very important decision. Each of these options has both strengths and weaknesses. However, the final decision comes down primarily to ones’ level of personal and financial risk, as well as to a simple matter of preference.
This short article will take a closer look at both types of loans with the intention of helping you make an informed decision.
A fixed rate mortgage is a good option for individuals who like being able to know exactly how much they will be required to pay on their mortgage each month. There are no surprises with a fixed rate mortgage. It is also a great option if one plans to stay in their home for the term of the loan or for at least quite a while. They also work well for individuals on a fixed income.
Fixed rate mortgages do have their disadvantages. For example, fixed rate mortgages are not as flexible as adjustable rate mortgages. If interest rates drop, one will not be able to take advantage of these savings unless they refinance. Also, the interest rates on fixed rate mortgages tend to be higher than the starting rates of adjustable rate mortgages (ARMs).
Adjustable rate mortgages have lower initial rates, but then rise after a set period of time. This means that ones’ payments are lower initially but rise as interest rates grow. This may be a good choice if one doesn’t plan to stay in their house very long, or is having difficulty paying their mortgage, due to a short term circumstances, such as a layoff, a new baby, etc.
This option might give individuals a year or two to catch up financially before they are required to pay the higher payments that will follow the initial low rates of the adjustable rate mortgage.
Fixed and adjustable rate mortgages are two very different financing options. Fixed rate mortgages work well for those who like to be able to predetermine their financial outlays as much as possible. They are also a great choice for those who don’t necessarily like to take financial risks.
Adjustable rate mortgages work well when interest rates are low, when one doesn’t plan to stay his/her property for very long, are unable to make initial large mortgage payments or are simply looking to save money. When making a borrowing decision, it is important to take proper inventory of ones’ level of risk, financial plans and personal tolerance.