Which is the Best Mortgage Option for You?

Fixed Or Adjustable?

Having the low initial cost of adjustable Rate mortgages (ARMs) can be very tempting to home buyers, yet they carry the degree of uncertainty. On the other hand, having a Fixed Rate Mortgage can offer rate and payment Security, but they can be more expensive. There are many advantages and disadvantages of the Mortgage">adjustable rate mortgage and the fixed rate mortgage.

Adjustable Mortgage Advantage

The advantage of having an ARM is that it allows borrowers to take advantage of falling rates without Refinancing. ARM borrowers don't have to pay a whole new set of Closing cots and fees. They just have to watch the rates and their monthly payments fall. Another advantage is that ARMs feature lower rates and payments early on in the loan Term. ARMs also offer a cheap way for borrowers who don’t plan on living in one place for very long to buy a house. Last, but not least, ARMs help borrowers save and invest more money. For example, if the Borrower's payment is $200 less with an ARM, then the borrower can save that money and earn more off it in a higher-yielding investment.

Adjustable Mortgage Disadvantage

The disadvantage of having an ARM is that the rates and payments can rise significantly over the life of the loan. For example, a 6 percent ARM can end up at 11 percent in just three years if rates rises sharply. Another disadvantage is a borrower's initial low rate will adjust to a level higher than the going fixed rate level in almost every case even if the rates in the economy as a whole don’t change. The initial fixed rates of the ARMs are set artificially low. Also, borrowers can end up owing more money than they did at closing when the payments on their loan are set so low they only cover part of the Interest due; this is called a negative Amortization loan. Any additional amount due gets rolled into the Principal balance. Unfortunately, no matter the exact terms, most ARMs are more difficult to understand than fixed rate loans.

Fixed Mortgage Advantage

The advantage of having a fixed rate mortgage is that the rates and payments remain constant. Borrowers will not be surprised even if inflation surges out of control and mortgage rates head to 20 percent. Another advantage is that borrowers like stability and that makes budgeting easier. Managing your money with more certainty lessens stress as well. Fixed Rate Mortgages are also simple to understand. First time home buyers would not understand what a 7/1 ARM with 2/6 caps was if it hit them over the head, and why should they? It is already hard enough to understand many of the definitions thrown at you when you decided to purchase a home for the first time.

Fixed Mortgage Disadvantage

The disadvantage of having a fixed rate mortgage is that borrowers will have to refinance and come up with a few thousand dollars in Closing Costs, make a few trips to the Title company's office, and spend several hours digging up Tax forms, bank statements, etc., just to take advantage of falling rates. Another disadvantage is that it can be very expensive for some borrowers, especially those with high rates, because there is no early-on payment and rate break.

Categories