Fixed Mortgage Vs Adjustable Mortgage

There are several different types of mortgages. The most common are the Fixed Rate Mortgage (FRM) and the Adjustable Rate Mortgage (ARM). The most common mortgage sought by first time home buyers is a Fixed Rate, 30 year mortgage. To help you understand each type of mortgage, we've given a brief explanation for comparison below.

Fixed Rate Mortgage - 30 Years

This is the most commonly used mortgage plan. Your monthly payments are lower than they would be on a shorter (15 year FRM) term loan. The interest rate is locked in when you secure the mortgage and does not change over the life of the loan.

Advantages:

Fixed monthly payments over the life of the mortgage.
Longer life, lower payments.
Fixed interest rate over the life of the mortgage.
Can refinance if rates go down

Disadvantages:

Interest rate higher than 15 year FRM and Variable Rate Mortgage (VRM).
Interest rate does not change if rates go down.
Total interest paid over the life of the loan is much higher than a shorter term mortgage.

Fixed Rate Mortgage - 15 Years


Also becoming very common, the 15 year mortgage results in higher monthly payments, but a lower interest rate.

Advantages:

Fixed monthly payments over the life of the mortgage.
Fixed interest rate over the life of the mortgage.
Total interest paid over the life of the mortgage is much lower than that of a 30 year FRM.

Disadvantages:

Shorter life, higher payments.
Interest rate does not change if rates go down.
Smaller tax deduction because less interest is paid.

Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage has a fixed interest rate at the time the mortgage is secured. At the start of the loan, the payment is also fixed. Neither the interest rate, nor the payment are fixed for the life of the mortgage, however. After the initial fixed period, both the interest rate and the monthly payments are adjusted to reflect the then current market interest rates. The calculations to determine the adjustment is at the discretion of the lender, each using their own formula and index.

Advantages:

Lower monthly payment at the beginning of the loan.
Rates and payments may go down if rates go down.
A borrower may qualify for a larger loan.

Disadvantages:

Higher risk.
Payments may rise as rates rise

 

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