The Difference Between an Adjustable and Fixed Rate Mortgage

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When shopping for a new home, the options seem endless. You’ll look at several houses before you make your decision, but your choices don’t stop there. You’ll also need to decide between an adjustable rate mortgage and a fixed rate mortgage. Both have pros and cons, so it’s important to know the difference before you decide. Read on to find out more information on each type of mortgage so you can make the right choice for you.

A Fixed Rate Mortgage

If you opt for a fixed rate mortgage, you’ll have the peace of mind of knowing your mortgage interest rates will stay the same for the entire length of the loan. This is beneficial if the housing market is unstable or crashes because it could save you thousands of dollars in interest over the life of your loan. The interest rate you begin with (determined by the market rates at the time you take out the loan) will be the same every single month until you pay off the debt.

An Adjustable Rate Mortgage

When you have an adjustable rate mortgage loan, your interest rates fluctuate depending on the market rates at the current moment. For instance, you may begin with an interest rate of 4% for the first five years of your loan. At the end of that five years, the rate may jump much higher depending on the current state of the market at that time. People planning to stay in the home for the entire length of the loan (usually 30 years) stand a better chance of saving a lot of money by having an adjustable rate mortgage and riding out any fluctuations – good or bad – throughout the years.

No Real Winner

It is difficult to say that one type of mortgage is better than the other. Which one works best for you depends on your specific needs at the time you purchase your home. If you’re only planning to own the home for a short time, a fixed rate may be the best way to save as much money as possible. If you’re planning to own the home for the entire length of the loan, an adjustable rate loan could keep more money in your wallet. If you’re not sure what the future holds for you in terms of home ownership, choosing a fixed rate mortgage is the safer option.

More Information on Adjustable and Fixed Mortgages

If you’re in the market for a new home, be sure to check with your local lending institution for more information on which type of mortgage is right for you. The experts there can help you determine whether an adjustable or fixed rate will be the most beneficial. Also keep in mind that these types of mortgages apply to refinancing as well, so be sure to get all the answers you need to make the right decision.

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