Fixed Rate vs ARM Rate

Whenever anyone applies for a new mortgage loan, they are often given two choices: a fixed rate mortgage (FRM) or an adjustable rate mortgage (ARM).

Which one you choose will depend on your financial circumstances. However, do not make the mistake of thinking that an FRM is always a better choice as often times an ARM loan can save you a significant amount of money.

Do not be frightened of ARMs!

An ARM loan typically consists of two phases. The first period has a fixed rate but once that period is over, the rate adjusts periodically based on certain indexes.

On a fixed rate loan, the interest rate is fixed for the entire term regardless of what happens in the future. The tricky part is deciding which loan to choose as you could be saving or spending extra money depending on your choice.

The reason why the adjustable mortgages have recently gone under fire is simply because those who had them were not prepared for the risks.

So when the rates eventually went up a few years later, they were not able to afford the payments and were forced to sell their home. Cases like these are rare but being prepared can prevent them from happening.

So which one is better?

This is what everyone wants to know but unfortunately there is no clear cut answer. Your finances and your level of risk matter a great deal.

If you are planning on living in your home for a long period of time, then a fixed term mortgage may better for your situation as you do not have to worry about constant fluctuation. Even if the rates do fall, then you can always refinance.

On the other hand, if you are only planning on staying in your home for a short while then an ARM will be best as your monthly payments will be much lower.

Before considering an ARM, it is important that you understand the risks by calculating how much you can afford to pay if the rates increase.

In the long run though, you will benefit since you can take advantage of low rates before they have a chance to rise.