Fixed mortgage rates vs. adjustable mortgage rates

By: Yara Zakharia, Esq.

Navigating through the home-buying process can seem quite daunting, especially in light of different loan types. Therefore, acquiring a solid understanding of various mortgage options comes in handy and facilitates the task for the borrower. Mortgage interest rates can affect the choice of mortgage and dictate when it is advisable to effectuate a change.

What follows is a summary of the most popular and prevalent mortgage interest rates. Prospective borrowers can use this list to help narrow down the choices to those most suitable:

1. Fixed Mortgage Rates:

With mortgage interest rates known as 'fixed mortgage rates', the borrower's monthly payments for interest and principal remain the same for the duration of the loan. These rates do not fluctuate as long as the borrower is in a fixed term agreement. Borrowers will know the exact amount of their payments and consequently, will have an easier time performing their personal budgeting, regardless of whether rates rise or fall.

When mortgage interest rates are going up, a fixed-rate mortgage is recommended due to the fact that it locks in the current rate and protects borrowers from future hikes in rates.

Long-term fixed mortgage rates

2. Adjustable Mortgage Rates:

These mortgage interest rates are adjusted periodically based on an index. Borrowers should opt for adjustable mortgage rates when rates are falling. This is because these mortgage interest rates change at regular intervals (typically every one, three, or five years), thus enabling borrowers to capitalize on the new, lower rates.

The most common types of adjustable mortgage rates are the following:

1) 10/1 year Adjustable Mortgage Rates:

In this scenario, mortgage interest rates and monthly payments stay the same for 10 years. Beginning with the 11th year, the mortgage interest rates are adjusted on a yearly basis; therefore, payments can change each year for the remainder of the loan.

These kinds of adjustable mortgage rates are a good choice for borrowers who:

* plan to relocate within 10 years,
* would like the loan to remain in effect in the event of a change in plans,
* plan to live more than 10 years in the home, or
* seek initial payment stability and are open to changes later down the line.

2) 5/5 & 5/1 year Adjustable Mortgage Rates:

The mortgage interest rates and monthly payments remain constant for five years.
Beginning with the 6th year, the mortgage interest rates are adjusted every year (for 5/1 ARM or Adjusted Rate Mortgage) and every five years (for 5/5 ARM).

This form of adjustable mortgage rates is ideal for borrowers who:

* favor initial payment stability and are accepting of change in the future,
* expect to reside more than 5 years in the home,
* want loan to remain in force in case plans change, or
* expect to relocate within 5 years"

3) 3/3 & 3/1 year Adjustable Mortgage Rates:

Under this plan, the monthly payments and mortgage interest rates do not change for 3 years. Beginning with the 4th year, the home mortgage interest rates are adjusted every year (for 3/1 ARM) and every three years (for 3/3 ARM).

These mortgage interest rates will be appealing for borrowers who:

* expect to reside more than 3 years in the property
* prefer initial payment stability and can tolerate changes in the future
* plan to relocate within 3 years
* would like the loan to remain in effect in the event plans change"

4) 1 year Adjustable Mortgage Rates:

Here, the mortgage interest rates are adjusted every year; as a result, monthly payment is subject to change every year for the entire 30-year loan term.

This category of adjustable mortgage rates is the perfect fit for borrowers who:

* wish to benefits from the lowest rate possible
* cannot qualify for higher rate programs
* are willing to accept annual payment changes

When shopping for a mortgage, borrowers should research current interest rates and keep an eye on rate activity. Generally-speaking, mortgage interest rates reflect the overall tendency of interest rates and fluctuate along with Wall Street securities. By observing key financial indicators and the general direction of the mortgage market, borrowers can improve their chances of reaping interest rate savings.

In conclusion, each borrower must decide what type of mortgage interest rate he is willing to pay. This will depend on the borrower's financial situation and personal circumstances and how much he is willing to pay each month. Fixed mortgage rates and adjustable mortgage rates are dominant players in the mortgage interest rate field."