Fixed rate loans charge a fixed interest rate that does not change over time. The balance of principal and interest paid each month varies, but the general payments remain the same, which helps budget owners. Borrowers are protected from interest rate increases, but when rates are high, it is more difficult to qualify for a loan because the payments are less affordable.
Adjustable rate loans have interest rates that vary over time. The initial rate is below the market rate, and then rises. ARMs typically maintain the initial rate for anywhere from a month to 10 years. But if it is kept long enough, the ARM will eventually exceed the current fixed rate loan rate.
The arms offer low initial payments. They let the borrower qualify for a larger loan, and let the borrower enjoy lower interest rates in a falling rate environment.
To choose the right one for you, consider these questions:
1 / How big of a mortgage payment can you afford today?
2 / Could you still afford an ARM if interest rates go up?
3 / How long do you intend to live on the property?
4 / Are interest rates going up or down, and do you expect that trend to continue?
An ARM may be right for you if low payments in the short term are important, and you do not plan to live on the property for long. If interest rates are expected to fall, an ARM guarantees you will enjoy lower rates without having to refinance. But if you want a predictable payment, or interest rates are rising, a fixed loan is better.
