Fixed-rate and adjustable-rate mortgages are the two main types of mortgages of the home-lending world. Let's take a look at the differences.
A fixed-rate mortgage is very straightforward. The borrower knows from the beginning what the interest rate will be for the entire duration of the mortgage, and the monthly payments due are likewise fixed. Simple.
Slightly less simple is the adjustable-rate mortgage, or ARM. It changes from year to year, to reflect the interest rate environment. If rates are plummeting, your rate will also drop -- and vice versa. ARMs typically have an extra-low "teaser rate" for the first year, as well as an upper limit, or cap. The amount that an ARM can rise each year is also limited, so that it won't rise too quickly.
Fixed-rate mortgages are good because they come with no surprises. But for this benefit, you'll likely pay a slightly higher rate than you would with an ARM. Fixed-rate mortgages are good for people who enjoy stability. They're also especially attractive during periods when interest rates are low, such as they have been in recent years. At such times, fixed-rate mortgages permit you to lock in low rates for many years to come.
Conversely, if the prevailing interest rates are very high and you think rates are more likely to fall than rise, an ARM might make more sense. In addition, since ARM rates are typically slightly lower than fixed rates, they permit people to borrow a little bit more, and the difference can help you buy a slightly spiffier house. ARMs are often recommended for those who will be in a house for only a few years, since the rate is not likely to change too much in that time. Beware, though -- don't enter into an ARM unless you're sure you'll be able to handle the worst-case scenario and your rate quickly rises to the cap.
If you're looking to buy or sell a home, educate yourself before you get too far into the process. Spend some time in our Home Center, which features lots of money-saving tips and even some special mortgage rates.
You might also want to check out these articles:
- Buying a House Is Easy!
- So You Want to Be a Landlord?
- Make Money as a Landlord
- A Mover's Survival Kit
- 10 Things to Know About Mortgages
- 10 Home Enhancement Tips
In addition, drop by our Buying or Selling a Home discussion board.
And finally, if you're in the market for a mortgage, another way to inform yourself about options is to spend some time at the websites of lenders. Here are some major lenders:
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Wells
Fargo
(NYSE:WFC) -
Capital One
(NYSE:COF) -
Washington
Mutual
(NYSE:WM) -
Wachovia
(NYSE:WB) -
Countrywide Financial
(NYSE:CFC) -
National City
(NYSE:NCC)
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