Fixed Rate Mortgage vs Adjustable Rate Mortgage

Every home loan is different and just as each one of us has different housing needs, we also have different financial needs.

The two most common home loans are fixed rate and adjustable rate loans. Just as the name implies, a fixed rate loan will not change over time. When you choose a fixed interest rate loan, you can expect your monthly payments to remain the same from the time you begin the home loan until the time you finish.

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As you pay the interest on the loan you will incrementally pay off the initial amount too, eventually leading to complete home ownership.

Adjustable rate mortgages, on the other hand, change over time and follow a financial index. Also known as ARMs, adjustable rate loans will either increase or decrease your monthly payment depending on the market at the time. While this may not seem as intuitive, there are many reasons to consider this option for home financing.

One of the main reasons is the possibility of enjoying lower monthly payments. Lenders generally will reward you when you take some of the risk and this can lead to lower interest rates during an initial fixed interest period.

Finally there are also combinations of fixed rate loans and adjustable rate loans. These hybrid ARMs, may begin with a fixed rate lasting months to years then lead to an adjustable rate further into the life of the loan. This is attractive to home buyers only planning on staying in their home for a few years at a time.

So when deciding between a fixed rate loan or an adjustable rate loan, consider what your housing needs are. If you plan on staying put for the life of the loan then a fixed rate may be the better option for you. If you are a new homeowner and don’t plan on living in the house for too long then an adjustable rate may be best.