Fixed Rate And Adjustable Rate Mortgages – What You Need To Know Before You Make A Final Decision By: John R. Blakefield The dominating and most popular interest rates used when considering a mortgage are fixed rate and adjustable rate mortgages (also known as ARM or variable rate mortgage). Choosing the type of interest rate for you should be used based on personal criteria and what it is you want to achieve with your monthly payments. Adjustable rate mortgage are loans that a borrower pays an interest rate on the loan amount that changes based on specific indexes that the lender chooses. Lower monthly payments are offered at first then the monthly payment might be higher or lower based on the interest rate of the index at that time. The adjustment period, or the period between the change of interest rate may be decided between you and the lender. However, the adjustable rates often change based on a six month, one year, three year, five year, or even seven year period. Adjustable rate mortgages are a good choice for those who may be in the following positions. You should choose an adjustable mortgage rate if there are unpredictable interest rates, making a fixed rate difficult to obtain or if you are willing to bear the risk for the possibility of the interest rate increasing and are rewarded by an initially lower rate. The person who chooses this type of rate must realize that interest rates do change often, and if they go up, your payment may be higher than the original rate dictated, and may be lower if the interest rate decreases. It is important to prepare yourself for these possible changes in the market so a monthly payment that is considerably higher or lower after the adjustment period does not come to a shock, whether positive or negative, to your personal finances. So how exactly is this adjustable rate mortgage determined? The original interest rate may be chosen based on an index, or a publicly published financial index such as treasure securities or national or regional average costs of funds of savings and loans associates. A margin is then added to the index determining the interest rate. The margin is usually the lenders' profit above the financial index. If the original interest rate is offered at an extremely low rate, then the lender may be offering you a discounted rate, which temporarily maintains your monthly payments low for a specific introductory period then changes according to the index rate and adjustment period. When considering an adjustable rate mortgage, it is important to compare the terms, which may include, the index that is being used to determine the rate, initial change cap, the periodic cap, lifetime cap, what the margin is and if the margin is variable or constant over the life of the loan, and if you have the option to convert your loan to a fixed rate loan at a future time. Caps are limits that are set on the interest rates of the loan. They are always available to the borrower and are expressed in the following fashion: 2/2/5. The first number is the initial change cap, which is the limit set on the interest rate for the first adjustment period. The second number is the periodic cap, which is the limit set on the interest rate for every subsequent adjustment period. And the third number is the lifetime cap, or the total limit set on the rate for the life of the loan. It is often set at 6% for the first mortgage but may vary depending on the loan. Of course, the lower the numbers the better for the borrower. Always be sure to ask the lender this information so you can make an educated decision on if the specific adjustable loan is going to work for your financial situation. A fixed rate mortgage is a loan where the interest rate remains the same for the life of the loan. The initial interest rate is often higher than an adjustable rate, but produces stable monthly payments. A fixed rate mortgage is good for those who want to always have the same monthly payment and don't want to risk having a higher monthly payment or benefit from a lower monthly payment that an adjustable rate may produce. When considering a fixed rate loan, it is important to look at the terms which may include interest rates, monthly payments and fees. A fixed rate loan is simpler than an adjustable rate loan, but still you must look at the interest rate, the margin, and any fees or points that you may have to pay the lender in exchange for borrowing the loan amount. Always ask about fees and points because they may not be clearly outlined or expressed when first considering a loan. Or, they may need to be added to the interest rate directly advertised to the borrower. You do not want to agree to a fixed rate loan, and then be surprised by a fee or points that were not added originally, but were disguised in small print. Recently, a "hybrid" adjustable rate mortgage has developed. This "hybrid" rate has an introductory rate for a two year period, or three, five, or seven year period, then becomes a six month adjustable rate mortgage after this time period, rather than every two years. This specific rate is good for those who are planning to move within seven years, or simply want to live in a more expensive home that may beyond his or her abilities to qualify for a fixed rate loan, or live in an area where home values rise quickly. With both adjustable and fixed rate mortgages, you should compare other terms such as prepayment penalties or due on sale clauses. Prepayment penalties are fees that are paid to the lender for paying the loan before the life of the loan is finished. The lenders are, in essence, earning what they would if you paid the interest for the rest of the life of the loan beyond the date when you paid the loan in full. A due on sale clause simply states that the borrower must pay off the entire loan if he or she sells the mortgaged property. These terms may or may not be part of the mortgage, but it is important to know every aspect of your mortgage, whether or not it is a fixed rate or adjustable rate mortgage. This can save you the costs of choosing a mortgage that is not right for your personal situation. About the Author: John R Blakefield is a mortgage and real estate specialist. For more information, articles, news, tools and valuable resources on home mortgages or investment loans, refinancing, debt solutions, visit this site: www.scourtheweb.com/mortgage/.

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