Fixed mortgage or adjustable
The main benefit of a fixed-rate mortgage is that your payment remains the same
through the life of the loan. Terms are also much simpler to understand. This predictability makes planning
When the mortgage interest rates are high, they can be an expensive option based on there are no initial rate cuts.
However, if want to take advantage of dropping interest rates, you would have to refinance, which requires
additional paperwork and costs.
In conclusion, fixed-rate mortgages are pretty standard from lender to lender, which means there is little room for
customization of your loan.
Adjustable-Rate Mortgages (ARMs)
ARMs can allow you to afford a bigger mortgage.
Remember, if rates begin to fall, you do not need to refinance in order to see your payments go down; they will
automatically be recalculated at the new, lower rates. If you know your income will be rising or know you will be
selling the house in less than five years, ARMs may be a good option for you to consider as an option.
However, when you have an ARM, your payment and interest rate can go up significantly. So, during the life of
the loan, even if you have a rate cap in place. The initial rates are usually lower than market rates, so
when you receive your first adjustment, it can be quite a change, since the rate cap don't always apply to the
first adjustment time period.
Here is an example, an annually adjusted ARM for $250,000 may start at 4.75%, but a 6% rate cap could allow it
to go to 10.75% within four years. This would raise the payment from $1477 to $2,532, an increase of $1,055 making
the adjustment significant.