How to Compare Fixed Rate Mortgages and Adjustable Rate Mortgages

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:

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