Fixed Rate vs. Adjustable Rate

In the game of mortgages knowing which mortgage will work for you is all about knowing yourself. For example – do you have the discipline needed to only use the interest rate option when needed and not every month? If not than a fixed rate loan may serve you better where the payment remains constant month to month – it’s important to pick the one which best suits your financial character.

Advantages of a Fixed Rate Mortgage:

• Long term stability – Even with unpredictable mortgage rates your fixed rate and payment will remain unaffected
• No surprises – Lean economic times make budgeting every dollar a must, and knowing exactly what you’ll be expected to pay on your mortgage month to month will help to keep your budget on track
• Plans are easy to understand – FRM mortgage plans are a lot easier for the average consumer to understand than the Adjustable rate plans, with all their variables

Disadvantages of a Fixed Rate Mortgage:

• Payments are higher – Because the ARM mortgages have payment options where a homeowner can choose to pay only interest or principal on the loan, the fixed rate payment will always be considered the higher payment mortgage.
• No payment options – Every month is the same payment, there is no “out” in case of medical or financial emergencies.
• A lower rate will cost you money – Refinancing your current fixed rate to a lower one will entail paying the loan costs all over again.

Although Fixed and Adjustable rates are very similar now, fluctuating rates such as the ARM mortgages have can cause a great deal of uncertainty with your payment, which is expected to always going up until you hit your rate cap.

A rate cap can change an initial ARM rate by as much a 6%.

Advantages of an Adjustable Rate Mortgage:

• Lower starting rate – The lower rate can get you in the door of your first home or help you to refinance when needs like remodeling or cash on hand are needed.
• Option payments – loan allows borrower to choose between 3 option payments, which can give a drooping financial situation a boost or break if needed.
• Short term situation – If your not planning a long term stay in the home than the lower rate can mean lower payments for the duration of your stay

What are the 3 options for payments?

1. Principal and Interest: This option is the most liked your fixed rate loan would be with the borrower making the full minimum payment
2. Principal only:No interest is paid so interest keeps adding to the principal of the loan
3. Interest only: you only pay the interest payment so you are never decreasing your principal and could end up with a *negative amortization loan.

*Homeowner owes more money on their house or property than its current assessed value.

Disadvantages of an Adjustable Rate Mortgages:

• Difficult to understand – With so many ARM options available understanding all the plans can get a little daunting.
• Financially unstable – Changing rates and things like Interest – only payments can be financially detrimental if not handled with discipline.
• Lower rates can be deceiving – What looks affordable at the lower starting rate can actually turn out to be more home than the borrower can realistically afford if the rate goes up too high (life caps can change a loan rate as much as 6%), or they are making only the minimum payments.

Keep your dream home from becoming a nightmare by choosing a mortgage option that will take you into the future one affordable payment at a time.