Fixed Rate and Adjustable-Rate Mortgages

Just like there’s no magic loan amount that’s perfect for all borrowers, different types of loans are appropriate for different borrowers, depending on their individual needs and plans. Understanding the differences between fixed-rate and adjustable-rate mortgages can help determine the best option for you.

Fix-rate mortgages. The main benefit of a fixed-rate mortgage is your payment never changes for the life of the loan. This keeps things simple, and the predictability makes planning easier. However, fixed-rate loans make it harder to take advantage of dropping interest rates – requiring the work and cost of refinancing – and if the initial rate is high, the long-term cost can be hefty. Fixed-rate mortgages are also rather standard procedures from lender to lender, leaving little room for customization.

Adjustable-rate mortgages. Adjustable-rate mortgages (ARM) can help you afford a bigger mortgage, so if you expect your income to rise or plan on selling your home within five years, this may be the option for you. And if interest rates drop, you don't have to refinance to enjoy lower payments. However, with an ARM, your payments can increase dramatically if interest rates rise -- even on ARMs with increase caps -- and initial rates are almost always lower than market rates, so the first adjustment can be a big one. (Remember: Caps don't always apply to the first adjustment!)