How to Decide Between a Fixed-Rate & an Adjustable-Rate Mortgage
When taking out a mortgage loan, homeowners have several choices. But the two most common types of loans are fixed-rate and adjustable-rate mortgages. With fixed-rate mortgages, your interest rate will remain in place throughout the life of your mortgage, never changing. With adjustable-rate mortgages, you'll start your loan with a low interest rate, often lower than the market rate, that lasts for a set period of time, usually five to seven years. Your loan will then enter its adjustable phase, and your interest rate and payment will change, depending on how various economic indexes are performing. As a result, your payment might go up or down. You need to take a close look at your financial situation to determine which loan is right for you.
Other People Are Reading
Things You'll Need
- Estimation of your monthly income
- Estimation of your monthly debts
- Current mortgage-interest rates
Instructions
-
-
1
Determine how important it is that you know exactly what you'll be paying each month in mortgage costs. If you don't like uncertainty when it comes to finances, a fixed-rate mortgage might be more appropriate than an adjustable-rate one.
-
2
Study your current monthly income and debt levels. Do you think your income will rise in the coming years? If so, you might be able to afford a larger mortgage payment---the kind that usually comes with a bigger home---in the future. For now, you can take out an adjustable-rate mortgage, with its lower initial mortgage payments, to help you get into a larger house. When the loan adjusts in five or seven years, your income will be higher and the new, possibly higher mortgage payments won't be as much of a burden. But be careful not to stretch yourself too thin financially. You don't want to find yourself unable to pay your mortgage if it adjusts to a higher interest rate.
-
-
3
Study the current average mortgage interest rates on 30-year and 15-year fixed-rate mortgages. If they are already low, in the 5 to 6 percent range, there is little reason to get an adjustable-rate mortgage. Historically, rates have rarely fallen that low, so the odds are good that taking out a fixed-rate mortgage in the 5 to 6 percent range will be a wise financial move.
-
4
Meet with a mortgage banker or financial planner before deciding on an adjustable-rate or fixed-rate mortgage. These professionals can look at your financial situation and help you determine which loan type is right for you.
-
1
Tips & Warnings
Many homeowners refinance to a fixed-rate loan right before their adjustable-rate mortgage is due to enter its adjustable phase. There is a risk here, though: If home prices fall, homeowners may not have enough equity in their residences to qualify for a refinancing. Many lenders require that homeowners have at least 20 percent equity in their homes (though this figure can vary) before approving them for a mortgage refinancing.
Past history is a good indicator of how mortgage interest rates will behave. But no one can predict exactly how rates will rise or fall in the future. Mortgage banks and lenders can point out historical trends, but there is no guarantee that rates will follow these trends.
