Before you decide which one is the better for you, it is important to know what a 30 year fixed rate mortgage or a 15 year fixed rate mortgage and adjustable rate mortgages for different periods mean.
Fixed Rate Interest Mortgage
As the name suggests, a fixed interest rate mortgage has a constant interest rate throughout the life of the loan.
The advantages of a fixed interest rate mortgage are:
-the interest rate that you pay remains the same irrespective of the market conditions
- you know the monthly payment amount that you need to pay for a fixed interest rate mortgage
- if the interest rates go down you always have the option to refinance
Disadvantages of a fixed interest rate mortgage are:
- you pay a higher rate of interest
Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage has the interest rate fixed for 5 or 10 years or whatever period the contract specifies. After the fixed rate period is over, the interest rate would rise by a fixed percent which also be specified in your contract.
A point to note is that ARMs are also to be normally paid off in the 30 year period but the interest rate is fixed only for the initial period. A five year ARM does not mean that you have to pay it off in five years.
The advantages of an adjustable rate mortgage are:
- you pay much lower interest for the initial period
- if the interest rates go further down, you may refinance
- you can pay make extra payment that goes against the principal which builds helps to build equity in the home.
The disadvantages of an adjustable rate mortgage are:
- the rise in the interest rate after the initial period may be governed by the prevalent market rates at that time. Therefore the increase in the monthly mortgage payments might be more than what you expect.
- The adjustable rate mortgages have a very tempting interest rate for the initial period that many a homeowners fall for. After the initial period is over, the monthly payments can increase drastically especially for the interest only adjustable rate mortgages. This can ruin the monthly budgets of the family. This was as a matter of fact one of the major factor contributing to the collapse of the economy in 2008.
So which one should you choose?
If you are planning to sell the home off before the initial period of the adjustable rate mortgage is over, getting an ARM would keep your monthly payments lower allowing you to pay off the principal thereby building some extra equity in your home.
If you plan to live in your home for a long time, it might make sense to go for a fixed rate mortgage so to have a peace of mind where you do not have to worry about fluctuating interest rates.
The above are just the personal opinions of the author. You must analyze your personal financialconditions and other plans before deciding on the type of the mortgage. Brokers may also advice but you should use your own judgment rather than relying on someone else’s.
