Which mortgage is better: fixed rate or adjustable?
A fixed rate mortgage loan is a mortgage loan in which the interest rate remains the same from the day you take out the loan until the day you pay it off. Regardless of fluctuations in market interest rates, your interest rate never changes. Your payments remain steady, as well. The entire debt, including interest, is repaid in equal monthly installments. With an adjustable rate mortgage (ARM), your interest rate is initially lower than a fixed rate but then will be adjusted periodically to keep up with changes in interest rates. As your interest rate changes, the amount necessary to pay off your loan by the end of the term changes. Thus, your monthly payment amount is recalculated with each rate adjustment. There is typically an initial rate guarantee period, plus caps on how much your rate can increase in any year.
If you are conservative by nature, have a fixed income, or believe interest rates are rising, a fixed rate mortgage may be an appropriate mortgage for you. With a fixed rate mortgage, changes in the economy will not affect your loan. Your interest rate and payment amount stay the same until the mortgage is paid off. ARMs are by nature less predictable than fixed rate mortgages because the interest rate and payment amount can rise or fall, sometimes substantially. With an ARM, you trade the predictability of fixed interest and payments for the possibility of lower interest and payments in the future. If you will be staying in the house only for a few years, the lower initial rate of an ARM makes sense.