While there are many different types of mortgage loans available at present, they can generally be grouped into two kinds: fixed rate mortgages and adjustable rate mortgages. The decision to go with a particular mortgage loan depends on your present situation and the amount of risk that you are willing to take. Below we outline some of the advantages and disadvantages of both types of mortgage loans and a few ideas on how to choose the mortgage loan that is right for you.
Fixed Rate Mortgages
Fixed rate mortgages are generally better options if security and stability are your primary concerns. Since fixed-rate mortgages have a predetermined interest rate throughout the entire course of the loan, you will know exactly how much you have to pay every month. Hence your monthly principal and interest payment will remain unchanged for the duration of the mortgage. While some adjustable rate mortgages have an introductory period during which the interest rate is fixed, a truly fixed rate mortgage has one interest rate for the entire term of the mortgage loan.
One disadvantage of fixed rate mortgage loans is that they typically have a higher interest rate than an adjustable rate mortgage. In general, the longer the term of your mortgage loan, the larger the premium between a fixed and adjustable rate mortgage. If the mortgage borrower plans to stay in their house for many years and believes that interest rates may go up, then the premium today could be a substantial saving tomorrow.
Adjustable-rate mortgages (ARMs) Adjustable rate mortgages do offer lower interest rates at the outset, but interest rates and payments will likely change in the future. With adjustable rate mortgages, the interest rates are dependent on general interest rates or what is known as an index. There are many adjustable rate mortgages that can be considered hybrid mortgages, in that they offer fixed interest rates for a period of 1, 3, 5, or 7 years. But another type of ARMs can reset at much more frequent intervals. If a homeowner knows that they will only stay in their home for a few years, then a hybrid adjustable rate mortgage loan may meet their needs. It’s always important to keep in mind, however, that payments on adjustable-rate mortgages could increase when the interest rate resets. Many ARMs, however, impose limits on how high-interest rates can increase during an adjustment period.
Choosing the right mortgage loan for you How do you make a decision on which types of mortgage loans to go for? As we mentioned at the start of this article, that decision is dependent on the risk that you are willing to incur and your present situation. If you want the peace of mind that comes from knowing exactly how much you will have to pay every month, fixed-rate mortgages present the safer alternative. Adjustable rate mortgages may be more affordable at the beginning, but there are more risks involved. In any case, careful comparison shopping will help you decide which mortgage loan will best suit your needs.