Valerie Mozee
English 4
10/26/2013

The difference between fixed rate and adjustable rate mortgages.

 

 

There are a number of differences between fixed-and adjustable-rate home loans. Understanding these differences can help prospective borrowers navigate home loan financing so they can borrow the right type of loan suits them. Let's define these two terms before diving into differences.

 

 

Fixed-rate Mortgages(FRMs) have interest levels that never change for the whole lifetime of the home loan. FRM's are attractive since home loan borrowers know exactly how much they will pay each month for the entire duration of the agreement, which makes budgeting easy. While it seems quite obvious why borrowers would opt for the comfortable predictability of FRM's, when interest rates are high it may be difficult to qualify for an FRM since payments become less affordable.

 

 

Adjustable-rate Mortgages (ARMs) as their name implies, ARMs have an interest level that changes, or "adjusts", periodically. Because of this, lenders typically change lower initial interest rates for ARMs than FRMs, knowing that ARMs can have their rates increase after a short fixed-rate introductory period. This period makes an ARM easier to afford initially, even when compared to a fixed-rate home loan for the same amount of money.

 

 

Decisions, Decisions

 

Borrowers should ask themselves whether they want the potential short-term and tentative benefits of ARMs or the long term predictability of FRMs. An individual's appetite and tolerance for high risk can be the strongest determining factor when selecting between two types of loans. Borrowers need to balance their personal finances with the economic reality of the fluctuating mortgage market. In fact, borrowers might find ARMs more advantageous if a borrower can save money during the short low-interest introductory period.

 

It's vitally important for borrowers to understand how large of a mortgage payment they can afford as well as whether they can afford an ARM if rates rise. Borrowers that will live on a property for a short period of time might benefit from ARM over an FRM; especially if interest levels are in decline. Of course if rates are rising, then locking in a steady rate with an FRM could be prudent.