There are two major types of mortgages, fixed rate and adjustable rate (ARM), for you to choose from when you are shopping for a loan. There are pros and cons to each type of mortgage. The best one for you will depend on your personal situation in addition to prevailing interest rates and the generate state of the economy, but there are some basic guidelines you can use to help you make your decision.
Fixed rate mortgages are the traditional type mortgage that most of us think of. On a fixed rate mortgage the interest rate does not change over the life of the loan. This means your mortgage payment will remain the same. Fixed rate mortgages normally are for terms of fifteen or thirty years, although there are also forty year mortgages now. The major advantage of a fixed rate mortgage is that your mortgage payment will not change no matter how interest rates change in the financial markets. You will always know what your mortgage payment is going to be. The major drawback to fixed rate mortgages is that when shopping for a mortgage that interest rate is going to be higher initially than adjustable rate mortgages.
Adjustable rate mortgages (ARMs) have interest rates that adjust or change every six to twelve months. The interest rate may go up or down, depending on what the current interest rates are at the time. The main advantage to an adjustable rate mortgage is that it will initially have a lower interest rate than a fixed rate mortgage. However, the disadvantage is that your interest rate will constantly be changing. When interest rates go up, your mortgage payment goes up.
There is also the hybrid ARM which combines features of the fixed rate and adjustable rate mortgage. In the first few years of the loan, which can range anywhere from two to ten years, the mortgage has a fixed rate. After that, the interest rate adjusts every six or twelve months just like and a regular adjustable rate mortgage does. The hybrid ARM can be advantageous for borrowers who don’t plan to own their home or property long term.
There are advantages and disadvantages to each type of mortgage, and it also depends on what the interest rates are at the time. For borrowers who are on fixed incomes or who need financial certainty, a fixed rate mortgage is probably the best choice. When interest rates are high, adjustable rate mortgages can make loans more affordable for many borrowers.