Making a Choice: Adjustable or Fixed-Rate Mortgage

When it comes to mortgage types, there are traditionally two categories: fixed rate and adjustable rate. Both types of mortgage loans can be advantageous to you financially but it really depends on your financial situation to determine which will work best for you.

What the Difference?

Adjustable-Rate Mortgages

Adjustable-rate mortgages are those that contain an interest rate that fluctuates along with a predetermined index throughout the term of the loan. If the rates go up, your mortgage payment will go up. If the rates decrease, you’ll may less each month on your mortgage payment. Typically, the adjustable-rate mortgage is riskier because there is no way to predict how the rates will trend. It can be difficult for those on a fixed budget to calculate and meet mortgage payment amounts. If finances are not a concern, an adjustable-rate mortgage may be beneficial when the rates are down and payments are lowered. For those with financial concerns, an adjustable-rate mortgage may not be the answer. Interest rates will likely continue moving in the upwards direction and adjustable rate mortgages make it hard to create long-term planning goals.

Fixed-Rate Mortgages

With a fixed-rate mortgage, the interest rate on the mortgage loan stays the same from the beginning to the end of the loan. That means a borrower’s payment never increases but it doesn’t decrease either. The stability of a fixed-rate mortgage is a definite pro for anyone who relies on a budget to keep finances on track.

A fixed-rate mortgage also protects the homebuyer against inflation. During a period of inflation, the cost of goods rises and the value of a dollar is decreased. You are paying more money for less product. A fixed-rate mortgage doesn’t change regardless of the economy so you are technically paying less for your mortgage. Homeowners will see the benefits of this if they plan to remain in their home for five years or longer.

How to Get the Best Rates

If you are looking at getting a fixed-rate mortgage for your home purchase, know that only the creditworthy will get the best rates. If you have less-than-perfect credit, you may still be eligible for a loan but at a higher rate than other borrowers. Lenders are very strict these days about who they are lending money to for mortgage loans. They want to know you are able to meet the financial obligation and they are doing more due diligence in checking out the financial stability of each new borrower.