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Fixed Versus Adjustable Mortgages: Here’s What You Should Know

Considering mortgage options for your future home? Take a look at the basic types of mortgages.

As Investopedia explains, a homebuyer should first determine what his or her needs are and then, determine what type of loan best suits your situation— a Fixed-Rate Mortgage or an Adjustable-Rate Mortgage:

Fixed-Rate Mortgages

These loans, which typically extend anywhere from 10 to 30 years in length, maintain a set rate of interest throughout the entire life of the loan.

You can also choose a shorter-term fixed-rate loan to pay off your loan in a shorter amount of time. Shorter-term loans are usually about 15 to 20 years in length.

The difference between a shorter and a longer term fixed-rate mortgage would affect the monthly payment. If you choose a shorter-term mortgage, you will be required to pay higher monthly payments.

What kind of buyer would a Fixed-Rate mortgage suit?

This kind of home loan is best suited to the home owner who wishes to remain in the home in the long term. With lower monthly payments over a longer amount of time (30 years for example), you can likely allocate money to other financial goals.

Yet, you might consider a short-term loan in order to pay off your mortgage sooner.

Adjustable-Rate Mortgages

Unlike the Fixed-Rate Mortgage, an Adjustable-Rate Mortgage only maintains a set rate during the first few years of the loan (anywhere from 3 to 10 years). After this point, the mortgages rate will fluctuate along with the market conditions.

As you might imagine, this option can present greater risk than the fixed-rate mortgage if you are unable to pay the higher monthly installments should the market fluctuate in this direction.

The benefit? In the initial years of the loan the interest rates tend to be lower.

What kind of buyer would an Adjustable-Rate mortgage suit?

This type of loan can work well for the homebuyer who either does not intend to remain in the home beyond that initial fixed-rate period or plans to refinance the loan before the initial period is over and the fluctuating rates begin.


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