Fixed Rate Mortgages or Variable Rates: Which One to Choose?

If you are not experienced in the mortgage industry, you may not know the difference between some of the more common mortgage terms. Here is a brief discussion of the differences between a variable rate mortgage and a fixed rate mortgage.

If you are searching for your first home, chances are you may not have a great deal of knowledge about the mortgage market and some of the terms used in the industry. Two of the more common terms you will come across are “fixed-rate mortgages” and “variable-rate mortgages.” Although they sound the same, these two ideas are very different.

Until the recent housing crisis, variable rate mortgages seemed like the way to go. When you have a variable rate mortgage, each month your mortgage payments are based on the current interest rates. When rates were low, homeowners were enjoying the lower payments on their mortgage. However, those rates increased and many homeowners found themselves in a dilemma. They were unable to pay their mortgages because of the variable rate. They did not think that rates would go that high. As a result, thousands of homeowners have been displaced due to foreclosure.

Variable rate mortgages are not recommended for first-time homebuyers who are inexperienced in the housing market. Variable rates are better left to those who are investors who can “time” the market and make a profit from the rates adjusting every now and then.

Fixed rate mortgages, on the other hand, are ideal for most homebuyers. Fixed rate mortgages may cost a little more each month, but at least the homeowner knows exactly how much their mortgage payment is going to be from month to month. With a fixed rate mortgage, your monthly payments will remain the same throughout the life of the loan unless you decide to refinance.

The best time to get a fixed rate mortgage is when the rates are low. Right now, mortgage rates are at the lowest point they have been at in decades so now would be a great time to jump into the housing market if you have been holding off for whatever reason. One of the only disadvantages to getting a fixed rate mortgage is that if the base rates go down, you cannot benefit from the lower rates. You can, however, consider refinancing at the lower rates. If you have been in your home for a few years and you are in a better credit situation than you were when you bought the home, you could benefit by refinancing if the rates drop.

Fixed rate mortgages are without a doubt the ideal way to go if you are looking for security and a consistent payment each month. I think we have all learned about the dangers of variable rate mortgages with the last couple years of economic problems in which they have played a major role.

Comments

  • Anonymouse

    August 14, 2010

    Idiot!
    An ARM may save you more money if you plan to stay there for less than 12 years

  • Steven

    August 14, 2010

    ARMs have their places. It does depend on timing. If you plan to stay in your house for less than 5 years and think rates will stay low, then a variable rate may be for you. But as we've seen, may people think they are moving, only to stay or be stuck. Or people think they can refinance out of a variable rate only to find they don't have enough equity.

    I got a 30 year mortgage in 2003 and people thought I was crazy. I recently refinanced down to a 20. Peace of mind to me is the most important factor. I don't want to even have a shred of worry that my mortgage payments might go up in the future.

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