Fixed Rate or Adjustable?

One of your first decisions should be between a fixed rate  and an adjustable rate mortgage.  Fixed rate mortgages have an interest rate that remains constant through the life of the mortgage. With an adjustable rate mortgage, the interest rate is adjusted--either up or down--at specified times during the mortgage term.

Adjustable Rate Mortgages (ARMs) will have an initial interest rate lower than fixed rates but will adjust upward unless rates really fall. They may be a good choice if you are sure that you will not own the home for an extended period (more than 5-7 years) of time.

Advantages and Disadvantages of Fixed and ARM Mortgages

Advantages--Fixed
•Since you know what your payment will be for the life of the loan, you can budget more easily.
•No possibility of an interest rate change making your mortgage payment suddenly unaffordable.
•No anxiety over interest rate fluctuations.

Disadvantages--Fixed
•More income needed to qualify because of higher initial mortgage rate.
•If interest rates decrease appreciably, it will be necessary to refinance to get a lower payment.

Advantages--ARM
•Lower interest rate for the initial fixed prior and therefore lower monthly payment.
•If interest rate declines, your payment will also decline.
•Easier to qualify for due to lower initial interest rate and payment amount.

Disadvantages--ARM
•If interest rate increase at the end of their fixed term, your payment will also increase.
•A large increase in interest rates--and payment--could make your house unaffordable.