Choosing a Mortgage: Adjustable Rate vs. Fixed Rate

What type of mortgage to choose is a very important question when buying a house. Will it be more appropriate to choose an adjustable rate mortgage (ARM) or a fixed rate mortgage? Many potential homeowners ask this question, willing to know what are they in for with this two options. The first thing to understand here is that the type of mortgage you choose actually determines the amount of interest payable and the overall size of your monthly mortgage payments. Initially ARMs offer lower costs, which look very attractive to smart investors, but the reverse side of this option is that the mortgage rate is subject to fluctuation, which introduces high degree of uncertainty. Fixed rate mortgages, on the contrary, provide high degree of certainty, but are generally more expensive. Thus your particular situation will determine what type of mortgage is more suitable for you, and in this article we shall try to give you some hints that will hopefully help you in choosing between the above two options.

ARMs are a great option for homeowners who don’t intend to live in a house for a very long time: if mortgage rates are falling and you are not planning to live in the house for a period long enough for them to start rising when the market situation changes, then an ARM might be your perfect choice. Moreover, because ARMs offer lower rates at the initial stage of the mortgage period, you get a chance to buy a larger and more expensive house that you could afford with a generally more expensive fixed rate mortgage. Besides, if you a lucky enough to see mortgage rates falling during your mortgage period, then, with an ARM, you are able to take advantage of lower monthly payments and save some of your money.

But ARMs also have a substantial downside, which is a possibility of mortgage rates to dramatically increase over a short period of time. To partially eliminate the devastating consequences of mortgage rate rises, ARMs provide lifetime caps, but these caps can sometimes be reached in as short as three years since the beginning of your mortgage period.

Fixed rate mortgages are much more secure, because they do not depend on fluctuating factors like inflation or current situation on the housing market. Whatever happens, you always have the same monthly payments, which gives you a better chance to plan your budget and presents less surprises during thee mortgage period. Fixed rate mortgages are thus generally easier to understand and are much more stable than ARMs.

But there are downsides in this option as well. Since the mortgage rates are fixed and independent of market fluctuations, a borrower will have to refinance his home in order to take advantage of falling mortgage rates, which requires a lot of additional paperwork, closing fees, processing fees etc. Besides, fixed mortgage rates are almost identical in all banks, and thus a potential borrower will not have much choice when searching for a lender.

Well, these are basically all the main facts. Carefully assess you current situation before making a choice – you surely want to get the best deal possible.