How to Decide Between a Fixed-Rate and Adjustable-Rate Mortgage

With a fixed-rate mortgage, your interest rate is set for the duration of your mortgage. With an adjustable-rate mortgage, also known as an ARM, your interest rate varies after an initial period (usually one year). Your decision on which way to go should depend on your personal financial situation and on what makes you most comfortable.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Personal Organizers
• Online Mortgage/finance Services

1. Know your personal comfort level. Some people want to know up front what their mortgage payment will be, regardless of how interest rates changes or how long they live in the home. Others want to capture the lowest interest rate currently available, regardless of future events.

2. Consider both types of mortgages objectively. If you're considering an ARM, what will your initial mortgage payments be, how much will the ARM change, and at what intervals? (Your lender should be able to tell you what your payment will be using various interest rates.) If you're considering a fixed-rate mortgage, are you comfortable knowing that your payment will remain constant, even if interest rates go down?

3. Take a hard look at your personal finances. What will your earnings be over the coming years? What kinds of payments will you be able to handle? Compare the potentially higher payments under the ARM with your ability to pay those rates.

4. Make a decision based on what makes the most sense for your situation.

Tips & Warnings

• Most mortgages include the payment of real estate taxes. For a fixed-rate mortgage, real estate taxes are generally the only thing that can cause your payments to change; for an ARM, of course, taxes are just one of several factors.
• If you anticipate being in your house for only a few years, keep a sharp eye on how many points you may have to pay to lock in your interest rate, as well as on closing costs. (A point is 1 percent of the amount of your loan; buyers generally have to pay a certain number of points as part of their closing costs and may be asked to pay points to earn a better interest rate.)
• Different ARMs have different features. Be sure you completely understand all of them fully.
• Always take into consideration the worst-case scenario. While an ARM may let you take advantage of lower interest rates in the future, you could just as easily find yourself facing a sharp rise in interest rates.

on 11/22/2005 Students and those associated with Universities should always inquire with the vendor about special "academic" rates. Most often, vendors are happy to accomodate those with limited budgets.