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Fixed Rate V. Adjustable Rate Mortgages

Much ado has been made lately in the news about adjustable rate mortgage holders and their fears of paying a whopping amount once their adjustment period kicks in. This is a valid concern for many homeowners who may see their monthly payments rise by 25 percent or more. Likely, a number of homeowners will default and put strain on the housing market due to their inability to repay their debt. Is an adjustable rate mortgage a bad idea and should you only consider a fixed rate mortgage? Read on and we'll do some comparisons of the two.

Fixed Rate Mortgages - a fixed rate mortgage has one simple guarantee: your monthly mortgage payment will remain constant through the life of the loan. Yes, for the next 15, 20, 30 years or more you'll know exactly what your mortgage payment will be. Your property taxes and homeowners insurance will rise, but not your mortgage payment.

Adjustable Rate Mortgages - Sometimes called a variable rate mortgage, these types of loans have a fixed rate for part of the time - 3, 5, 7 or 10 years is common - but they can adjust anytime thereafter. So, if you have a 5 year loan your rate will be constant until year 6 when it will go through its first annual adjustment. Every year following your adjustable rate mortgage rate will change: some years it may go up and some years it may go down.

Typically, the rate of the adjustable rate mortgage is about one point lower than a comparable fixed rate mortgage. This is an attractive option for buyers who want to receive a little more house for the money or who could now qualify for financing that would have otherwise been out of their reach.

The trouble with the adjustable rate loan during the early 2000s, is that rates were at a historically low figure. Yes, some buyers were getting financed for as little as 4% while fixed rate mortgages were about 5%. Today, however, variable rate mortgages are up and these same homeowners could see their first increase, to as high as 7 percent or more!

Although an adjustable rate mortgage looks scary, chances are the worst of the increases are over. If you plan on financing a home purchase, then consider the marketplace and what you can afford. By all means go with the fixed rate if you plan on being in your home for the long term, but consider the adjustable rate if you know that you will see before the adjustment period kicks in.