Fixed or Adjustable Rate?

Interest rates are usually the single biggest factor when choosing a mortgage. Generally, the lower the interest rate, the better the mortgage is, but it all depends on what type of rate you choose.

There are two types of mortgages: those with fixed rates and those with adjustable rates.

• Fixed-Rate Mortgages
  Typically the monthly mortgage payment remains the same for the entire term of the loan – allowing for predictability in your monthly housing costs.

• Adjustable-Rate Mortgages (ARMs)
  Depending on the type of ARM you choose, your rate and monthly payment will change at specified times (in some cases, within a year, or after 10 years if you choose a 10/1 ARM) based on market rates that change regularly.

What type of mortgage rate should you choose?

Fixed rate mortgages may be a good choice for first-time homebuyers because they offer a stable monthly mortgage payment, allowing you to adjust to the financial responsibilities of homeownership.

If you plan to keep your home for a long time, a fixed-rate mortgage will likely save you money. Additionally, if you think your income will not change, a fixed-rate mortgage offers the security of always knowing that the mortgage principal and interest payment will stay the same. Although you should be aware that taxes and insurance can change over time and if they are part of your mortgage payment, they can increase it.

If you are confident your income will increase steadily over time and you want to qualify for a larger mortgage, an adjustable-rate mortgage may make sense. ARMs usually start with lower interest rates – and that means lower monthly payments. But keep in mind that ARM interest rates can go up over time – and so can your payments so you should look at the long term picture. Be aware of when your mortgage rate can change and plan ahead for potential increases in your monthly mortgage payment.

When considering an ARM, ask yourself:

• If the mortgage rate increases, can you afford a higher mortgage payment? Use our calculator to estimate how a higher mortgage rate can impact your mortgage payment.
• Do you plan to live in your home for less than 5 to 7 years?

You may also want to look at mortgage rate trends. While no one knows for certain what mortgage rates are likely to do in the future, it is worth understanding why they move and how they have moved recently when considering an ARM.