Fixed Rate vs. Adjustable Rate

A common question among homebuyers is this: do I want a Fixed Rate Mortgage or an Adjustable Rate Mortgage? Both mortgages are the most commonly used mortgages for home financing, and both have advantages and disadvantages. What it really comes down to is that both are good mortgages; you just have to figure out which one is good for you.

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The Fixed Rate Mortgage comes exactly as it sounds: with a fixed interest rate. The Fixed Rate Mortgage offers borrowers a consistent monthly payment that will not change in the slightest over the amortization of your mortgage. People on a fixed income or a strict budget will find the predictability of the Fixed Rate Mortgage appealing. If you apply for a Fixed Rate Mortgage and lock in while rates are low, you will enjoy a guaranteed low interest rate for the duration of your mortgage. A low interest rate is a plus because it will lower your monthly payments, and will allow you to focus your savings on other things.

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The Thirty Year Fixed Rate Mortgage is the most common mortgage that people use in the United States. The average working American finds that this payment schedule is the best for his/her budget.

The main disadvantage of the Fixed Rate Mortgage is strikingly similar to the main advantage. A Fixed Rate Mortgage comes with a fixed interest rate, which can be annoying if the market drops after you lock in your rate. However, you can always refinance if the market interest rate drops significantly.

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The Adjustable Rate Mortgage is also self-explanatory; it comes with an interest rate that adjusts according to the market. All Adjustable Rate Mortgages reflect a market index. COFI, COSI, LIBOR, and 12-MTA are popular indexes. Many Adjustable Rate Mortgages begin with an initial fixed rate period (usually one, three, five, seven, or ten years) and then adjust according to their index every year. The interest rate during this period is lower than a comparable fixed rate, but once the mortgage shifts over into the adjustable portion of its amortization, the interest rate will rise. Therefore, the Adjustable Rate Mortgage is beneficial for those who want an initial lower interest rate, and can either sell their home, or can afford their mortgage once the rate rises.

Like the Fixed Rate Mortgage, the greatest attribute of the Adjustable Rate Mortgage is also its pitfall. The fluctuation of this mortgage allows borrowers to take advantage of falling rate, but it also subjects them to rising rates. However, if rates rise significantly, one can always opt to refinance and lock in a lower interest rate.

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This site is not a broker and does not collect or solicit mortgage applications. Content is for informational or comparison purposes only. Services are not available in New York. Products and services may not be available in all other states.

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