Adjustable vs Fixed Rate Mortgages

Mortgage rates can either be fixed for the duration of your loan or can be adjustable. An adjustable rate mortgage is a loan that is set up with an interest rate that changes based on pre-determined criteria, primarily tied to the federal interest rate. If the interest rates are up, then your interest rate on your loan will be higher, if the interest rates are low than the interest rate on your loan will go down.

Adjustable rate mortgages (ARM) are generally fixed interest rates for a period of time and then become adjustable. Generally speaking the introductory interest rate for an ARM loan will be lower than a fixed rate mortgage. This is done in order to lower initial payments and allow people to take out larger mortgages, or give them smaller payments for the introductory period. This is attractive to people who may know that their income will be increasing over that period of time.

Whether or not to choose an ARM or a fixed rate mortgage has been debated for as long as there have been ARMs. Though people feel strongly in both camps, simple mathematics can assist you in determining which mortgage is best for you and your personality. Your personality? Yes. Some people are not comfortable with any uncertainty in their lives. The idea of having an uncertain mortgage payment in the future may cause them more stress than the money they are saving is worth. Therefore, factor your own comfort level into the equation.

Generally speaking, ARMs are 2, 3 or 5 years, though they can be longer or shorter. At the end of that period your interest rate will become variable unless you sell your home or refinance. If you think that the likelihood of your selling or refinancing within the period of the ARM is strong, than the lower interest rates of the ARM loan will be of great benefit to you. If you think it is unlikely that you will sell or refinance within that period, then you may not benefit from an ARM.

Bob and Robyn are a young married couple just starting out. Bob is in advertising sales and Robyn is a teacher. Bob is fairly confident that his income will continue to increase over the next several years as he works his way up to becoming an account executive. Robyn's income is more predictable and is on an upward trend. Being a young couple they do not have the finances for large mortgage payments.

Bob and Robyn are presented with two mortgage proposals for their $150,000 mortgage. Proposal one is a 30-year fixed rate mortgage at 6% and the other is a 5-year ARM at an introductory rate of 5.25%. The fixed rate mortgage payments would be $899.33 per month, not including taxes. The ARM would have a 5-year period where payments would be $828.31 per month, not including taxes. Bob knows that even if he can afford the extra $70.00 per month for the fixed rate mortgage, that $70 per month may be better spent knocking down principle during the ARM period. He is further confident that as his salary increases, he is likely to upgrade his home within five years or refinance to make home improvements. Bob and Robyn took the ARM loan.

John and Catrina are a married couple with three grown children. John has been employed at the same company for 18 years and Catrina has been with her company for 12 years. They have consistent and stable income. Neither John nor Catrina expect any substantial increases in their salaries. After their last child moved out of the home they decided to downsize and buy a smaller home. They have a substantial down payment and will only be taking a mortgage of $100,000 on their new home. John and Catrina are presented with the same loan options as Bob and Robyn were. John and Catrina, however, know that it is unlikely they will sell or refinance in the next five years. They are comfortable with the payment schedule and, therefore, prefer the certainty of the fixed rate mortgage.

There are countless websites that offer mortgage calculators to determine your mortgage payment. For your convenience we offer one on our site (if you are not going to have one on your site, we can remove this, though I think it'd be good to have one on your site). You can review the different payment schedules based on the interest rates quoted for the fixed-rate and the ARM. Once you know the different payment amounts you will be able to determine which loan makes the most sense for you and your unique circumstances.

Your mortgage professional should also be able to assist you in reviewing the options and making the best decision for you. The more open and honest you are with your mortgage professional the more helpful they will be. It is only if they are armed with full and honest information that they will be able to make recommendations to you.

Ethan Hunter is the author of many credit related articles. If you are looking for help with Home Loans or any type of credit issue please visit us at http://www.homeloanave.com

In The News:

---

Kings Bay Saint Marys & Kingsland Georgia - Affordable Home Mortgages

Buying a home is usually the largest purchase any of... Read More

Home Equity Loans 101

A secured home loan differs from an unsecured loan in... Read More

Advantages Of Mortgage Pre-Approval

There are several advantages to getting mortgage pre-approval before looking... Read More

Home Buyer Beware ? Know the Signs of Real Estate Market Trouble

Lots of articles have appeared recently about the booming real... Read More

Mortgage Debt Elimination in 5 to 7 years!

Mortgage Debt Elimination shows that most home loan debts will... Read More

Low Home Mortgage Interest Rate - Finding the Best Mortgage Rate

Interest rates are at an all time low, making now... Read More

Refinance After Bankruptcy

Refinancing your mortgage after bankruptcy is actually the same as... Read More

Mortgage Terminology for the First Time Home Buyer

Buying a Home for the first time can be a... Read More

Internet & Mortgage Calculations

"You've been approved!" The words you have always wanted to... Read More

Mortgage Information for the First Time Homebuyer

Inflation in the United States is increasing rapidly and home... Read More

How Good a Deal Is Your Banks Mortgage Insurance Plan?

When you go to the bank to get a mortgage,... Read More

The Truth behind Pension Mortgages

A pension mortgage may seem lucrative at the first sight.... Read More

Imagine Cutting Over $8,000 Off Your Mortgage This Year

I once helped a customer cut over $700 off his... Read More

Using a Calculator to Assess Your Loan

Buying a house is a very important step in your... Read More

Refinancing Mortgage Loan - Get The Lowest Interest Rate You Can When Refinancing

Refinancing can be a very simple process. You fill out... Read More

Homeowners? insurance: The mortgage connection

A home owners' insurance is the cover for the house... Read More

Comparing The True Cost Of Obtaining A Home Loan

Home buyers are often confused about where to begin in... Read More

Good FICO Credit Score? Tips to Getting the Most Out of Your Home Mortgage Loan With Good Credit

Sometimes so much is talked about how to solve the... Read More

What Are Home Equity Loans?

A home equity loan is simply borrowing on the difference... Read More

7 Credit Improving Steps You Must Take Before Applying For A Mortgage

If you think you have good credit, think again. Chances... Read More

Remortgage Debt Consolidation - The New Recourse For Credit Crunch

Shakespeare once said about human nature 'with nothing shall be... Read More

Selecting the Right Mortgage for You

A mortgage is a loan you take out to buy... Read More

What is a Remortgage?

A remortgage is changing your mortgage without moving your home.... Read More

Bad Credit? With Poor Credit You Can Still Refinance Or Get A Home Equity Line Of Credit

Have you decided to refinance your home or apply for... Read More

Refinance Your Home Equity Loan

Refinancing your home equity loan is an excellent way to... Read More