Adjustable Versus Fixed Rate Mortgages

An adjustable rate mortgage is a mortgage with an adjustable interest rate. This means that the interest rate on your mortgage will change after a specific amount of time. What usually happens is that at first, your interest rate on your mortgage is low, but when the time comes for your interest rate to adjust, you could experience an increase of several points on your interest rate. The obvious effect of this is that you would have to pay more money on your mortgage of which more of it would go to interest payments that do not decrease your principle.

On the other hand, a fixed rate mortgage is a mortgage where the interest rate for your mortgage does not change. Put simply, you pay the same interest rate over the life of our mortgage regardless of the current economic situation. You can, however, get a different interest rate (hopefully lower) if you refinance your loan. However, just because your original loan had a fixed interest rate, this does not mean that your refinanced loan will also have a fixed interest rate.

Based on these differences, when should you get an adjustable interest rate over a fixed interest rate or vice versa? Depending on the current economic condition, you may want to obtain an adjustable rate mortgage or a fixed rate mortgage.

Interest rates are based upon the current economic condition. Therefore, if the economy is in bad shape, interest rates are generally lower because less people are borrowing money. On the other hand, when the economy is in good shape, interest rates tend to be higher because the demand for loans is higher. As such, if you obtain a mortgage during a good economic time, you may have to settle for a higher interest rate. Therefore, you may want to consider an adjustable rate mortgage in hopes that the interest rates will fall in the near future. If, however, the economy is in bad shape and you obtain a mortgage during this time when interest rates are low, you may want to get a fixed interest rate mortgage so that you can lock in on that low rate for the life of your loan.

Ultimately, the choice is up to you. When the time comes for you to obtain a mortgage, make sure that you talk to your lender or bank so that you will know the current interest rates. The last thing that you want to do is obtain a loan with a high interest rate when a lower rate was available. Analyze the economic conditions and discover which type of mortgage you should pursue.