Adjustable Rate Vs. Fixed Rate Mortgage Loans: Locking In On the Best Deal

You clicked on this page to find out one thing whether you should choose a fixed rate mortgage or an adjustable rate mortgage (ARM). Instead of giving you complicated definitions, lets discuss the top two questions you need to answer before making your choice.

The biggest mistake most people make is to wait until after they find a home to decide whether they can afford it. By that point, theyre committed to a house and will do almost anything to get it. So, instead of letting you make that mistake, I want you to answer a few questions first.

The Important Questions

How long do you expect to stay in the home? I know, its a hard question, and I dont expect you to be a fortune teller. But, think about it realistically. If youre moving for the school district, how long will your kids be in school? How long do you think youll stay at the same job?

How much can you afford to pay monthly for your home? Dont give the ideal answer thats $200 more than you can currently pay per month. Be completely honest with yourself. If that means you need to go in reverse and make a monthly budget, do it. Just make sure your budget includes some money that goes into savings every month so that when theres an emergency, youll be ready for it.

The Basics

Fixed rate mortgages the name says it all. You get a fixed rate that stays the same for the life of the loan, usually 15 or 30 years. Although your interest rate will be a little higher than with an ARM, you will know exactly how much youll pay per month for a few decades. If you love stability, this loan is probably for you. Also when interest rates are low, this is the loan that lets you cash in for years to come.

ARMs, on the other hand, are anything but stable. These loans generally have a lower initial interest rate than fixed rate loans (usually around 2% less). This initial teaser rate usually lasts anywhere from 1 to 10 years. Youll know its an ARM when you see 3/1, 5/1, 10/1; respectively, these are 3, 5, and 10 year fixed rates. After the set time, the rate varies based on a standard, usually the Treasury Bond rate. The rate can change monthly or yearly, but yearly changes usually work out best for the consumer.

Although were not going to talk about them here, there are several types of hybrid loans that can give you the best of both worlds. To find out more about those, check out this article from The Motley Fool, Your Choice of Mortgage: Basics and Variations.

Lets Look at Your Answers

Now that were through with the basics, lets talk about your answers. These are the most important questions you need to answer before shopping for a house. Did you catch that? Not before you look for a lender. Not before you hear what your monthly payment will be. Before you shop. Otherwise, you may want a house so badly that youll be willing to do anything to get it. These answers will not only help you decide on a loan, but theyll also help you choose a home.

Time in the Home

How long do you expect to stay in the home? Five, ten, twenty years? If you plan to stay in the home more than ten years and interest rates are low, you want to choose a fixed rate loan. The payment will be lower, and you can budget for the next thirty years, though its really more practical to choose a 15 year loan and save yourself thousands in interest.

If you answered ten or fewer years, you may want to choose an ARM. Generally, ARMs are available up to 10/1, which means that you pay the fixed rate for 10 years and then it becomes adjustable. The good news is that if you move before those ten years are up, then you will have saved money. If you discover youll be in the house longer, refinance when interest rates are low so that you can get a fixed rate loan. Also, if you can find a reasonable 10/1 and rates are high, you should probably take it since rates will probably fall within the next 10 years.

Monthly Payment

This is the single most important issue when purchasing a home. If you cant afford the monthly payment now, then dont assume youll be able to afford it later. Before shopping, decide how much you can pay and commit to sticking with that number no matter what.

If interest rates are low, lock into the savings with a fixed rate loan. If rates are extremely high, try to get a 5/1 or preferably a 10/1 ARM. When rates drop in that five to ten year span, refinance at a fixed rate.

ARMs have a cap on the rate, so before purchasing a home, calculate the highest possible monthly payment based on the cap and decide whether you could make the payment if rates went up. If not, youll need to hope for low rates so that you can refinance or simply choose a fixed rate loan.

The Bottom Line

The bottom line is to get the best deal you can right now and for the next ten years. Interest rates make a full swing about every decade. If you can save money with a 10/1 and you are pretty sure rates will drop during the first ten years, go ahead, choose the ARM, and refinance when rates are low. Remember to stay within your budget no matter what, and be prepared to refinance someday if you really want the best deal.

Amber Smith, is a free lance writer who writes home equity loan articles for the MortgageLoanOutlet.com You can read more mortgage loan refinance related articles at http://www.MortgageLoanOutlet.com

Amber is also the President of Polished Papers, LLC. http://www.polishedpapers.com

New Hamphire Mortgage Loan
New Hampshire mortgage loan can be organized into two types adjustable rate and fixed rates. Fixed rate mortgage (FRM), both ...

Mortgage Loan Interest Rates
If you are in the process of shopping for a mortgage you need to understand interest rates and which type of mortgage is best...

Mortgage Loans Explained In Plain English
With the many different kinds of mortgage loans out there, choosing the right one for your needs can be a difficult task. The...

Fixed Interest Rate Mortgages - Getting The Best Fixed Rate Loan
If you are purchasing your home and plan on staying rooted for a very long period of time, say forever, and you are financial...

Mortgage Loans - Types and Tips
Are you looking for a new home but confused about the mortgage loan and its types? Are you a fresher in the mortgage loan are...

Mortgage Refinancing What Do Rising Rates Mean for Your Mortgage Loan
Rising interest rates have been a frequent topic in the news this year. Many homeowners are concerned how higher interest ra...

Adjustable Home Loan Mortgage Rate Fluctuates When The Period Changes
When you look to buy a home, you have to be conscious of Adjustable Home Loan Mortgage Rates. They fluctuate so much, typical...

Home Mortgage Refinance Loan: Fixed Interest Rate or Adjustable Rate Mortgage
If you are in the process of taking out a new home mortgage refinance loan, choosing the right type of loan for your situatio...

A Quick Guide to Convertible Mortgage Loans
These days, it is amazing how many different mortgage options there are on the market. Some are better than others, and conve...

Adjustable Rate Mortgage Loans
An effective tool used by home buyers, ARM or Adjustable Rate Mortgages, offers a lower interest rate at the beginning of the...

Fixed Rate Home Mortgage Loan Options
Fixed Rate Mortgage Loansr Fixed rate mortgage loans are for consumers who want financial consistency and stability. r Your i...

Mortgage Refinancing - Fixed Interest Rate Loans
If you are in the market for a new mortgage loan, choosing the right type of mortgage could mean the difference between savin...

Refi Home Mortgage Loans - How Soon Can You Refinance an Adjustable Rate Mortgage?
Homebuyers have several loan options. Hence, purchasing a new home has r never been easier. Individuals who cannot afford a d...

Mortgage Loan - Adjustable Rate Mortgage ARM Basics
If you are considering or have already used an Adjustable Rate Mortgage (ARM) to finance your home, you need to understand th...

Important Mortgage And Home Loan Terms That You Need To Understand
For most people the mortgage industry seems to speak a foreign language, with terms and acronyms that are vague and unfamilia...

Mortgage Loan Rate Calculators
Mortgage interest rates vary and are influenced by credit rating of the borrowers and value of the property among other facto...

Mortgage Loan Terminology: Types of Mortgage Loans
Your mortgage is one of the largest investments you make. Choosing the right loan is important and will help you avoid makin...

40-Year Mortgages: An Alternative to Interest-only Loans?
Interest-only loans are quickly becoming a mainstream loan product. Borrowers who were initially turned-off by the perceived ...

Adjustable Rate Mortgage 101: Mortgage Refinancing with an ARM Loan
If you are considering an Adjustable Rate Mortgage (ARM) to purchase your home or to refinance your existing loan, there are ...

Refinancing Your Mortgage Or A Home Equity Loan - Which Is Better?
When it comes time to get the money you need to renovate your home, you have some choices to make concerning the financing of...