Mortgage Choice: Fixed or Adjustable Rate?

Posted on July 15, 2009

When you want to buy a house on loan, you must consider all your options carefully before choosing one of them. You must decide which mortgage is best for you and then settle for it when you are completely satisfied with it. Fixed-rate mortgage and adjustable-rate mortgage, both have their pros and cons.

With a fixed-rate mortgage you know that your principle and interest payments will stay the same and never change throughout the life of the loan, regardless of market conditions. A fixed-rate mortgage is an excellent choice in a low interest rate environment. You can get your loan for home purchase or refinance at a low rate which will ensure a low monthly payment for the life of the loan.

Adjustable rates are subject to change according to market conditions and fluctuate as interest rates move up or down. The adjustable-rates mortgage comes with different adjustment.

It will adjust according to your contract, possibly every three months, six months or once a year. Typically there will be a ceiling set for how much your loan can adjust during one adjustment period. However, in a rising interest rate environment several adjustments can make quite some change in your monthly mortgage payment.

Another option is also available which lies in between the fixed-rate and adjustable-rate mortgage which is called the hybrid adjustable-rate mortgage. In Hybrid ARMs, your interest rate will be fixed for a certain amount of time. You will see this expressed as 3/1 ARM, 5/1 ARM, etc. The first number indicates the period of time the interest rate is fixed before the mortgage becomes adjustable. The second number indicates how often the loan can adjust within one year after the fixed period has expired. A 3/1 ARM will tell you that the rate is fixed for three years and can then adjust once a year thereafter.

Before deciding which loan you should go for, you must decide your future plan so that you get maximum benefit. If you believe that interest rates will be lower in the future than they are now, then you must consider Adjustable-rate mortgage. And if you think that now the rates are lower than ever, then the fixed-rate option is best and go for it before wasting any time.