Adjustable Rate Mortgage Versus Fixed Rate Mortgage

When you are buying a home, you will probably need a mortgage to finalize the purchase of the house you have chosen. While choosing a home is an important decision, choosing a mortgage for the home is equally as important, and requires as much, if not more thought, than choosing the house itself.

When you go to the lender, you will be faced with two options for your mortgage-a fixed rate mortgage or an adjustable rate mortgage, commonly known as an ARM mortgage.

A fixed rate mortgage is a term mortgage for ‘x’ number of years at a fixed interest rate that is chosen and based on the economy and interest rate of the time you secure the loan. For the remainder of the life of the loan, your payments and interest rate will remain the same.

An adjustable rate mortgage is a term mortgage for ‘x’ number of years with interest rate reviews every one to three years. At the interest rate review, the interest rate applied to the mortgage amount will change by an undetermined rate.

While it is impossible to tell where the mortgage rates will be in ‘x’ number of years, there are a few factors to look at when choosing a mortgage. The ARM mortgage will immediately look like a ‘better deal’ because it will have a significantly lower interest rate than the fixed rate mortgage. However, if interest rates are already low, the ARM mortgage may end up costing you more in the long run. A little quick research or some simple questions to your lender about past interest rates will answer the question quite quickly.

Choose wisely when you pick your mortgage type-it will have equal impact on you as much as the house you choose does.

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