By Max Hunter
Mortgage rates can either be fixed for the duration of your
loan or can be adjustable. An adjustable rate mortgage is a
loan that is set up with an interest rate that changes based
pre-determined criteria, primarily tied to the federal
rate. If the interest rates are up, then your interest rate on
your loan will be higher, if the interest rates are low than
the interest rate on your loan will go down.
Adjustable rate mortgages (ARM) are generally fixed interest
rates for a period of time and then become adjustable.
Generally speaking the introductory interest rate for an ARM
loan will be lower than a fixed rate mortgage. This is done in
order to lower initial payments and allow people to take out
larger mortgages, or give them smaller payments for the
introductory period. This is attractive to people who may know
that their income will be increasing over that period of time.
Whether or not to choose an ARM or a fixed rate mortgage has
been debated for as long as there have been ARMs. Though
feel strongly in both camps, simple mathematics can assist you
in determining which mortgage is best for you and your
personality. Your personality? Yes. Some people are not
comfortable with any uncertainty in their lives. The idea of
having an uncertain mortgage payment in the future may cause
them more stress than the money they are saving is worth.
Therefore, factor your own comfort level into the equation.
Generally speaking, ARMs are 2, 3 or 5 years, though they can
be longer or shorter. At the end of that period your interest
rate will become variable unless you sell your home or
refinance. If you think that the likelihood of your selling or
refinancing within the period of the ARM is strong, than the
lower interest rates of the ARM loan will be of great benefit
to you. If you think it is unlikely that you will sell or
refinance within that period, then you may not benefit from an
Bob and Robyn are a young married couple just starting out.
is in advertising sales and Robyn is a teacher. Bob is fairly
confident that his income will continue to increase over the
next several years as he works his way up to becoming an
account executive. Robyn's income is more predictable and is
an upward trend. Being a young couple they do not have the
finances for large mortgage payments.
Bob and Robyn are presented with two mortgage proposals for
their $150,000 mortgage. Proposal one is a 30-year fixed rate
mortgage at 6% and the other is a 5-year ARM at an
rate of 5.25%. The fixed rate mortgage payments would be
per month, not including taxes. The ARM would have a 5-year
period where payments would be $828.31 per month, not
taxes. Bob knows that even if he can afford the extra $70.00
month for the fixed rate mortgage, that $70 per month may be
better spent knocking down principle during the ARM period. He
is further confident that as his salary increases, he is
to upgrade his home within five years or refinance to make
improvements. Bob and Robyn took the ARM loan.
John and Catrina are a married couple with three grown
children. John has been employed at the same company for 18
years and Catrina has been with her company for 12 years. They
have consistent and stable income. Neither John nor Catrina
expect any substantial increases in their salaries. After
last child moved out of the home they decided to downsize and
buy a smaller home. They have a substantial down payment and
will only be taking a mortgage of $100,000 on their new home.
John and Catrina are presented with the same loan options as
Bob and Robyn were. John and Catrina, however, know that it is
unlikely they will sell or refinance in the next five years.
They are comfortable with the payment schedule and, therefore,
prefer the certainty of the fixed rate mortgage.
There are countless websites that offer mortgage calculators
determine your mortgage payment. For your convenience we offer
one on our site (if you are not going to have one on your
we can remove this, though I think it'd be good to have one on
your site). You can review the different payment schedules
based on the interest rates quoted for the fixed-rate and the
ARM. Once you know the different payment amounts you will be
able to determine which loan makes the most sense for you and
your unique circumstances.
Your mortgage professional should also be able to assist you
reviewing the options and making the best decision for you.
more open and honest you are with your mortgage professional
the more helpful they will be. It is only if they are armed
with full and honest information that they will be able to
recommendations to you.
About The Author: Max Hunter is the author of many credit
related articles. If you are looking for help with Home Loans
or any type of credit issue please visit us at