Getting the Best Fixed Rate Mortgage can be a Big Stress Reliever

           

If you're like most Americans, your house may be the most expensive item you'll ever buy, and your mortgage is likely the biggest loan you'll ever need to secure. To ensure your long-term financial health, it's important to take the time to find the best mortgage that offers the lowest interest rates and the smallest monthly payments, but enables you to pay off your house in a reasonable amount of time.

One of the biggest considerations is whether it's best to go with a fixed rate mortgage or an adjustable rate mortgage. Which mortgage type is better in the short term? Which will save you money in the long run?

Fixed Rate vs. Adjustable Rate Mortgages

First, it's important to understand what each of these terms means. A fixed rate mortgage is one whose interest rate will not change over the course of the loan's term. Whether the mortgage is amortized over 5 years or 30, a fixed rate mortgage has an interest rate attached to it at the beginning of the loan, and that rate will not change unless the mortgage is refinanced.

By contrast, an adjustable rate mortgage (or "ARM") does not have a fixed rate. An ARM has an initial interest rate set for a certain length of time (usually anywhere between 6 months and 1 year after the mortgage begins), but after that period the interest rate may go up or down, depending on the market and current interest rates. As a result, monthly payments can change when the interest rate of an adjustable rate mortgage adjusts.

Each option has its merits, and each one has disadvantages. Read on to determine which is best for you.

Fixed Rate Mortgage - Pros and Cons

The biggest advantage of a fixed rate mortgage is security and peace of mind. With a fixed rate mortgage, your interest rate and monthly payments will be the same until the mortgage ends. You know exactly how much you'll have to pay for your home every month, with no surprises.

This can be a benefit for you if interest rates happen to go up, but it can also mean you might lose out on potential savings if rates should happen to go down during the term of your mortgage.

Adjustable Rate Mortgage - Pros and Cons

Adjustable rate mortgages have several advantages, but they're also inherently risky. An ARM offers a substantially lower initial interest rate than a comparable fixed rate mortgage, enabling many homeowners to purchase more expensive houses than they might on a fixed rate mortgage, but without the same security.

If interest rates go down, your interest and monthly payments might stay the same or drop a little, but if interest rates peak around the time that your initial rate becomes adjustable, you may be in for a big surprise. Some homeowners are shocked when their interest rates and monthly payments spike dramatically - sometimes enough to force them to default on their house or seek another way to pay off their mortgage when payments become too high.

Some adjustable rate mortgages have low initial rates because they create negative equity - that is, the payments made during the initial period of the mortgage are so low as to not even pay all the interest that is accruing, much less touch the principal. The additional interest that is not covered by initial payments is added to the debt of the mortgage, so the homeowner is faced with mounting debt to pay off (or owns less and less of their home, if they made an initial down payment upon purchase). This can be a financially dangerous situation.

If you're considering an ARM, it's best to read all the fine print before signing. If you prefer a lower-risk situation, it's safest to go with a fixed rate mortgage and rest assured that your payments won't change in the foreseeable future.