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FIXED RATE MORTGAGES VS. ADJUSTABLE RATE MORTGAGES

The payments on fixed rate mortgages remain constant throughout the life of the loan. Adjustable rate mortgages (ARMs) generally start out with a rate that is lower than a comparable fixed rate mortgage, allowing some buyers to afford a more expensive home. However, the rate will adjust up or down at specified intervals depending on market conditions.

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Fixed Rate Mortgages

Fixed rate mortgages are the most common type of mortgage. With a fixed rate mortgage, your monthly payments for interest and principal remain constant throughout the life of the loan. Property taxes and homeowners insurance may vary, but for the most part your monthly payments will not change very much.

There are two distinct features relating to fixed rate fully amortizing loans. First, the interest rate remains constant (fixed) for the entire term of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.

During the first portion on the life of the loan, a large percentage of the monthly payment goes toward interest. As the loan is paid down, more of the monthly payment is applied to principal, paying off the balance of the loan. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount. The amount of interest that is paid and the length of time it takes to pay off fixed rate loan can be significantly decreased by making even one additional payment each year.

Ask your loan consultant if a fixed rate mortgage might be right for you.

Adjustable Rate Mortgages

These loans usually start out with an interest rate that is lower than a comparable fixed rate mortgage, and can allow some buyers expecting an increase in income over the next few years  to afford a more expensive home now. Others may choose an adjustable rate if they do not plan to stay in a home for more than a few years, or if they expect to refinance their mortgage within a few years.

The interest rate on ARM mortgages changes at specified intervals (for example, every year or every month) depending on changing market conditions. If interest rates go up, your monthly mortgage payment will go up.

Some ARMs combine characteristics of both adjustable rate mortgages and fixed rate mortgages. These ARMs will start our at a fixed rate for a certain amount of time (for example, 1 year, 3 years, 5 years) and will then begin to adjust according to the market index. ARMs can also be combined with programs such as interest only (no principal payments are required) to achieve an even lower monthly payment.

Ask your loan consultant about these and other special kinds of mortgages that may fit your specific financial situation.

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