There are two types of mortgages, fixed rate and adjustable rate mortgage (ARM). Each mortgage type has its advantages and disadvantages.
What is a fixed rate mortgage?
A fixed rate mortgage loan locks in an interest rate for the life of your mortgage. This type of loan helps protect borrowers from rising interest rates. It also has a variety of term options, typically 15 or 30 years.
Fixed rate mortgage pros and cons
- Pro: This loan type has predictable payments that may allow for easier budgeting.
- Pro: The loan seems to be simple to understand and may be good for first-time buyers.
- Con: You may pay more interest over the life of the loan.
- Con: You have to refinance to get a lower interest rate, which can be costly.
Other considerations with a fixed rate mortgage
- The future: How long do you think you will stay in your home: 20-30 years?
- Budget: Do you want consistent monthly payments?
- Interest rates: Are current mortgage rates historically low for this type?
What is an adjustable rate mortgage? (ARM)
An ARM has a fixed interest rate usually for about 5-, 7- or 10-year terms and then the rate adjusts annually. They generally have a cap on interest rates so they only increase to a certain point.
Adjustable rate mortgage pros and cons
- Pro: The initial interest rate may be lower than on fixed rate mortgages.
- Pro: The loan can be customized to individual borrowers.
- Con: The interest rate on the loan may increase significantly.
- Con: The loan could seem more complex than a fixed rate mortgage.
- Con: The loan payment may fluctuate so you may not have consistent monthly payment amounts.
- Con: You may be required to pay more interest over the life of the loan, depending on how adjustable rates fluctuate over time.
Other considerations with adjustable rate mortgages
- The future: Do you plan to move or refinance before the adjustment period?
- Budget: Can you handle the fluctuating monthly payments?
- Interest rates: Are mortgage rates historically high?