Fixed Rate Mortgage and Adjustable Rate Mortgages

Buying a home can be an exciting and stressful time for anyone. While you may be excited at the prospect of owning your own home, especially if it is your first home purchase, the idea of choosing between all the different types of mortgages may leave you confused.

Advantage of Fixed Rate Mortgages

Two of the most common choices in the mortgage industry are adjustable rate mortgages and fixed rate mortgages. Fixed rate mortgages are the most traditional type of home mortgage, offering a fixed interest rate that does not change throughout the life of your loan. There are several important advantages associated with a fixed rate mortgage. First, if you are budget conscious, this type of mortgage will give you the peace of mind in knowing that your monthly mortgage payment will not change over the life of the loan. You can budget your financial obligations without worrying about a changing mortgage payment to throw things off.

Adjustable Rate Mortgage

An adjustable rate mortgage works differently. With this type of mortgage, you may be able to obtain a lower interest rate than would normally be available with a fixed rate mortgage; however, the interest rate is not fixed. This means that your monthly mortgage rate may change as interest rates change. With this type of mortgage, you may not be able to plan your budget due to payment fluctuations. There is usually a cap that will keep the interest rate from fluctuating too much. There is also the possibility that interest rates will drop and if that is the case because your mortgage is adjustable, your monthly payments may drop right along with the interest rate.

When deciding whether a fixed rate or an adjustable-rate mortgage is your best choice, you need to consider several factors. Ask yourself whether it is more important to be able to plan your monthly budget without wondering whether your mortgage payment will change or whether you would prefer to receive a lower interest rate at the beginning of your mortgage.

Mortgage Options

Remember that if you decide you would like to get the advantages of both you do have other options available to you. For example, if you feel the interest rate offered to you on a fixed rate mortgage is too high but you want the security of not having to worry about a fluctuating interest rate you can always buy down your interest rate by purchasing points. This will mean more upfront costs for your mortgage; however, it may be worth it to decrease the interest rate, especially if interest rates are currently high.

If you do elect to go with an adjustable rate mortgage make sure you understand exactly how high the rates may go as well as ensure you have enough ‘wiggle’ room in your monthly budget to cushion increases if they occur.

Talk to a mortgage broker about your options.