A fixed-rate mortgage means the interest rate and principal payments remain the
same for the entire life of the loan. (Taxes, of course, may change.)
Advantages include consistent principal and interest payments make this loan
stable your rate won't change, so you don't need to worry about market
fluctuations. A good choice if you're likely to stay in this house for a long
time.
Disadvantages include a possibly higher cost - these loans are usually priced
higher than an adjustable-rate mortgage. Keep in mind that, on average, most
people move or refinance within seven years. If rates in the current market are
high, you're likely to get a better price with an adjustable-rate loan.
30 Year Fixed-Rate Mortgages offer
consistent monthly payments for the entire 30 years you have the mortgage. So
if the market is good, you can benefit from locking in a lower rate for the
full term of the loan. The best choice if you're looking for a long-term,
stable loan - for instance, if you're planning on staying in your house for
some time.
20 Year Fixed-Rate Mortgages allow
you to make a consistent monthly payment throughout the 20 years you have the
mortgage. The shorter term means you pay the loan off more quickly, and
therefore pay less interest. And you'll build equity faster than you would with
a 30 year loan. (But remember the shorter term means higher payments, when
compared to the 30 year fixed-rate mortgage.)
15 Year Fixed-Rate Mortgages mean
consistent monthly payments for all 15 years you have the mortgage. By building
equity even more quickly than with a 30 year or 20 year loan, and paying less
interest, you'll save money in the long run. It's an ideal option if you can
handle the higher payments and if you'd like to have the loan paid off in a
shorter period of time - for instance, if you plan to retire.
An adjustable-rate mortgage (ARM) means that the interest rate changes over the
life of the loan - according to the terms specified in advance. With ARMs:
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The initial interest rate is usually lower than with a fixed-rate mortgage.
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The monthly repayment would also be lower.
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The interest rate may be adjusted (up or down) at predetermined times.
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The monthly payment will then increase or decrease.
Most ARM programs do offer "rate cap" protection, which limits the amount the
rate can be increased, both each year and over the life of the loan. All ARMs
are amortized over 30 years.
Advantages include lower costs - ARMs are usually priced lower than fixed-rate
mortgages so you can increase your buying power and lower your initial monthly
payments. If interest rates go down, you'll enjoy lower payments. Usually an
ARM is the best choice for homeowners who plan to relocate (for example, with
their company or the military), or for those who are purchasing their first
home and plan to be in the property only for three to five years. Remember
that, on average, most people move or refinance within seven years.
Disadvantages include the possibility of increasing monthly payments if interest
rates go up. Keep in mind that ARMs are best for homeowners who aren't planning
on staying with a property for a long period. If you're on a fixed income, an
ARM (especially a short-term ARM) may not be your best choice.
10/1 Adjustable-Rate Mortgages provide
a fixed initial rate of the loan for the first ten years of repayment. After 10
years, the rate adjusts every year thereafter for the remaining life of the
loan. The loan is amortized over 30 years, so you'll enjoy the stability of a
30 year mortgage at a lower price than a fixed-rate mortgage of the same term.
But an ARM is likely not the best choice if you're planning on owning the same
property for more than 10 years.
5/1 Adjustable-Rate Mortgages mean
the initial rate remains fixed for the first five years of repayment, and then
adjusts every year thereafter. Remember that your rate and monthly payments may
go up after only five years, so this choice is best if you're expecting to sell
or refinance the property within that period.
3/1 Adjustable-Rate Mortgages provide
three years at the initial fixed-rate, then the rate adjusts every year for the
remaining life of the loan. A good choice if you expect to move or refinance in
a relatively short period of time. But a much shorter fixed-rate period means
your interest rate (and therefore monthly payments) may begin to fluctuate
after three years.
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