ARM ( Adjustable Rate Mortgage ) Loan Vs. Fixed Loan

ARM ( Adjustable Rate Mortgage ) Loan Vs. Fixed Loan

One of the decisions you may have to make about your home loan is whether you want a "fixed rate" or "adjustable rate" mortgage. The answer will mean a difference in your payments, the total interest you will pay over the life of your loan, and the amount of uncertainty about the size of your payments in the future.

A fixed rate loan is one in which the interest rate stays the same, month after month, throughout the term of your loan. With a fixed rate loan, your payment never changes. You know what it will be two, ten, twenty years into the future.

An adjustable rate mortgage (ARM) is one in which the interest rate is keyed into an index, such as Treasury Bills or the Cost of Funds for Savings & Loans. When the index rate goes up, so does your interest rate, which means a higher monthly payment. When the index goes down, so does your interest rate and payment.

So... which is better? It depends! Fixed rate mortgages are predictable but the interest rates are higher, at least at the beginning of your term. Many people are more comfortable with this predictability, especially when interest rates are as low as they have been for the past few years!

But there are advantages to an ARM as well. The initial interest rate is usually substantially lower than fixed rate mortgages, and there will be a period during which it will not change. The difference that lower interest rate makes in your monthly payment may make the difference between getting the house you want or settling for something less.