When you’re taking out a new mortgage, not only do you have a choice between a handful of options: conventional, FHA, VA, USDA, and jumbo, you’ll also have to make a choice between a fixed rate or an adjustable rate (ARM) mortgage. Understanding the difference could help you save a lot of money over the course of your mortgage.
A fixed rate mortgage simply means that your interest rate is set in stone. Once you agree to it at the beginning of your term, it will never change unless you refinance at another time. The advantage of a fixed rate mortgage is that you never have to worry about your monthly payments rising and effecting your budget or pricing you out of your home. But that extra security does come at a cost: your interest rate will be higher than an equivalent adjustable rate mortgage.
Adjustable rate mortgages usually begin with an introductory period, generally 3-10 years, with a low, fixed interest rate before your interest rate begins to adjust with current market values. Adjustable rate mortgages come with a little more risk and uncertainty because after the fixed rate period, your interest rate could rise and increase your monthly payment, or it could drop and save you money.
Which Should I Choose?
- I don’t want to take on extra risk
- I like having a predictable monthly payment
- I think interest rates will rise over the years
- I am planning on staying in my house long-term
- I am willing to take on risks
- Instability is ok if it might save me money
- I think interest rates will fall over the years
- I plan on selling my house before the introductory period is over