When seeking out financing for your mortgage, whether for the initial purchase or a refinance, one of the most important decisions you will need to make is the choice between an adjustable rate mortgage and a fixed rate mortgage. Depending upon your situation, what you are predicting for the future and your personality one option may be better for you than another. This decision is not to be taken lightly as the wrong decision can cost you thousands of dollars, and, in some cases, can lead to home foreclosure.
Stability of Fixed Rate Mortgages
A fixed rate mortgage offers you the stability of knowing exactly what you are getting. No matter how market conditions affect interest rates, you are locked in to your rate and will have the same payment (not considering escrow fluctuations) month after month. For those personalities who do not like the idea of taking chances, especially with something as important as a home mortgage, a fixed rate is usually the choice.
Taking Risks with an Adjustable Rate Mortgage
Adjustable rate mortgages are normally for those who are not so risk averse. You will need to be prepared for rates that can rise and fall as market conditions change. It is certainly a gamble. You take the gamble that rates will fall rather than rise and if they do rise, they will soon fall to a level equal to or below what you could get with a fixed rate mortgage. A major scare associated with adjustable rate mortgages is that the rates can rise high enough that your monthly mortgage payments become unaffordable and you eventually have to forfeit your home through foreclosure. This is the worst case scenario for sure.
How Do Fixed Rate Mortgages Work
A fixed rate home mortgage is rather simple. Once you lock in that interest rate, your rate is just that—locked. Your monthly mortgage payments will not change unless you have an escrow account that will change due to tax and homeowners insurance changes. If rates fall below your locked in rate significantly enough that it makes sense to make a change, then you must refinance to get those lower interest rates. In a nutshell, it offers great stability but little flexibility.
How Do Adjustable Rate Mortgages Work
Adjustable rate mortgage interest rates do not increase or decrease day to day. Many mortgages are fixed for the first 3 or 5 (sometimes more) years and then adjustable rates come into play. There are generally restrictions on how often the rates can be changed and how many times during the life of the mortgage they can change. Caps on how high the rates can actually go can also be found on adjustable rate mortgages. Of course, there is the option of, at some point in the future, refinancing your home if rates drop low enough and lock in those low rates with a fixed rate mortgage.
Fixed Rate Mortgage Vs Adjustable Rate Mortgage: Making the Right Decision
The key to making the right decision is to know your limitations financially and research, as much as possible, the current market conditions. If the mortgage payments will make your budget rather tight, it is probably not a good idea to take a chance with adjustable rates or that worse case scenario may come true. As a general rule of thumb, if interest rates are higher than normal, consider adjustable rates. If interest rates are low (especially if really low), then lock them in with a fixed rate mortgage.