Which is Better - Fixed Rate Mortgage or Variable Rate Mortgage?

By Victor Thomas

To choose the right type of mortgage between a fixed rate mortgage and a variable rate mortgage (more commonly known as an adjustable rate mortgage or ARM); you need to understand the difference between the two. Fixed rate mortgages are that the interest rate remains fixed at a certain percentage over the life of the loan and therefore your monthly mortgage payment (principal and interest) never changes. With an ARM, the interest rate can and probably will change at periodic intervals during the life of the loan based on the market index your lender uses.

Know the positives and negatives of Fixed Rates mortgages Fixed rate mortgages are some of the most common mortgages available on the market today. Since you always know what your monthly payment will be until the loan is paid in full, fixed rate mortgages are considered a safe and a predictable way to borrow money with little downside risk. Usually with this steadiness comes higher interest rates and, consequently, higher monthly mortgage payments.

Know the Ins and Outs of ARMs Interest rates for ARMs are based on the market index. Your lender uses common indexes which includes the amount of money lenders pay on the money they borrow as determined by the FDIC, how much money the Treasury pays on the money it borrows, how much home buyers are paying on new mortgages nationwide etc.

Typically, interest rates for ARMs can fluctuate on a six-month, 1-year, 3-year or 5-year basis.
With an ARM, there are limits on just how much the interest rate can change. These 'caps' has to be outlined in your contract and fluctuations in the rate can only be made based on those terms.

Know the Benefits and the Risks The benefit of a fixed rate mortgage is that you always know what your monthly mortgage payment will be. The downside is that it' is more difficult to qualify for this type of loan and typically, you are not able to borrow as much money as you can with an ARM. The benefit of an ARM is that the initial interest rate is often lower than a fixed rate which means your initial monthly payments are lower, and it's a much easier mortgage to qualify for great for home buyers with lower incomes.

The downside of an ARM , however, is that your interest rate will fluctuate as your lender's index rate changes. This could mean higher monthly mortgage payments - an important consideration in determining whether or not you can afford the greatest possible increase in the interest rate and ultimately, the greatest possible increase in your monthly mortgage payment.

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