Key questions before picking a mortgage. Fixed and Adjustable Rate Mortgages

Jeff Appel Reporting

There are many different types or mortgages, but they can all be classified as either a fixed rate mortgage or an adjustable rate mortgage. Fixed rate mortgages offer the same rate and monthly payment locked in over the life of the loan, usually 15 or 30 years. Adjustable rate mortgages (ARMs) typically offer a lower introductory rate/payment that is fixed for a certain amount of time (1, 3, 5, 7 or 10 years depending on the type of ARM), and then adjusts regularly based on market fluctuations. So how do you know which one is right for you? Ask yourself the following questions:

1. How long do I plan on owning the home?

Buyers who are only planning to live in the home for the short term typically prefer adjustable rate mortgages, as they allow them to make lower monthly payments, until the home is sold. However, if you are planning to stay in the home for the long term, you may want the stability of a fixed rate mortgage.

2. What is my earning potential over the next several years?

If you are expecting to have relatively stable income, with small increases to your annual salary over time, you would probably benefit from a fixed rate mortgage. Buyers who receive bonus or commission based income, or expect considerable increases to their income while they are living in the home, might want to consider an adjustable rate mortgage.

3. How comfortable am I with payment changes?

Sometimes it just comes down to personal preference. If you are willing to risk future increases to monthly payments if it means you will have a lower monthly payment in the beginning of your loan, an adjustable rate mortgage may be a good fit for you. If not, go with a fixed rate mortgage.