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Fixed Rate Vs. Adjustable Rate Mortgage

Fixed Rate Vs. Adjustable Rate Mortgage

What is the Difference Between Adjustable-Rate and Fixed-Rate Mortgages?

The difference between fixed-rate and adjustable-rate mortgages is exactly what it sounds like.  With a fixed-rate mortgage, your interest rate remains fixed.  While the interest rate for an adjustable-rate is adjustable.  This sounds painfully obvious, but there are pros and cons to both types of loans, so let’s dig a little deeper.

The Adjustable-Rate Mortgage

The Adjustable-rate mortgage often referred to as the ARM, offers a lower interest rate than fixed-rate loans during the first 5 to 7 years.  After this initial period, the monthly payments could rise substantially.  This may be a good option if you don’t plan on living in a home for long or if you will make more money in the future.  Avoid any surprises and ask your lender to calculate the maximum monthly payment that could be due.  Cap rates do vary so be sure to shop around.

The Fixed-Rate Mortgage

A fixed-rate mortgage locks in the interest rate for the life of the loan.  Borrowers will only see fluctuations in their monthly payments when taxes and insurance premiums change.  Fixed-rate mortgages tend to have higher interest rates than ARMs because the lender risks locking in a low rate that could be much higher in the future.  When your lender pre-approves you for a mortgage, he or she will take this higher interest rate into account when determining how much house you can afford.

This higher interest rate does not seem to deter buyers as fixed-rate mortgages are much more popular than ARMs.  Most borrowers prefer the predictability of a fixed-rate with the future of interest rates being so uncertain. Fixed-rate mortgages are available in 15 or 30-year terms. Explore different types of loans available for home purchasing to ensure you find the best product for your financial future.