Adjustable Rate Mortgages and Fixed Rate Mortgages Offer Unique Benefits
Many home owners want to know whether they should choose an adjustable rate mortgage (ARM) or a fixed rate mortgage. Its an important question. The type of loan you choose will determine the amount of interest you pay and extent of your monthly mortgage payment. ARMs offer borrowers low costs initially. And while this initial low cost can be very tempting for smart investors, the offer also comes with a high degree of uncertainty because the mortgage rate is subject to fluctuation. Fixed mortgage rates, on the other hand, carry a high degree of certainty. But they are generally more expensive. The type of mortgage rate you select depends on you particular circumstances.
The Pros of Adjustable Rate Mortgages
An ARM is perfect for homeowners who dont plan to stay in their house very long. If mortgage rates are falling and you dont plan on living in your house long enough to see those rates rise when the market shifts, then an ARM might be in your best interest. Additionally, because ARMs feature lower rates during the opening stages of the mortgage, consumers have the option of buying a larger, more expensive house than they could with the higher price of a fixed rate mortgage. Essentially, ARMs allow homeowners to take advantage of falling mortgage rates. The more the rates fall, the smaller your monthly mortgage payment and the more you save. Smart consumers use these saving to reinvest in a high yielding investments.
The Cons of Adjustable Rate Mortgages
One of the primary negative aspects of an ARM is that mortgage rates can increase dramatically in a short period of time. While ARMs are structured with lifetime caps, these caps can be reached in as few as three years into the life of your mortgage.
The Pros of Fixed Rate Mortgages
Fixed rate mortgages provide homeowners with a sense of security. No matter what happens to the housing market or how high inflation skyrockets during the life of your loan, you will always have the same mortgage payment. This makes it easier for consumers to plan their budgets. Additionally, because fixed rate mortgages are easier to understand than ARMs, first time homeowners get fewer surprises.
The Cons of Fixed Rate Mortgages
In order to take advantage of falling mortgage rates, fixed rate borrowers will need to refinance their homes. This requires paperwork, processing fees, closing fees, and multiple phone calls (if not a few trips to the bank). Additionally, fixed mortgage rates are virtually identical from bank to bank. This means that borrowers interested in a deal are not going to find a tremendous amount of competition for their mortgage rate.
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[Source: Mortgage Blog]
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