Fixed or Adjustable?

Interest rates are usually the single biggest factor when choosing a mortgage. Generally, the lower the interest rate, the better the mortgage is, but it all depends on what type of rate you choose.

There are two types of mortgages: those with fixed rates and those with adjustable rates.

• Fixed-Rate Mortgages
  Typically the monthly mortgage payment remains the same for the entire term of the loan – allowing for predictability in your monthly housing costs.

• Adjustable-Rate Mortgages (ARMs)
  The interest rates change when the market rate changes. Rates can change daily, meaning that depending on the type of ARM you choose, your rate and monthly payment will change at specified times (in some cases, within a year, or after 10 years if you choose a 10/1 ARM).

What type of mortgage rate should you choose?

If you plan to keep your home for a long time, a fixed-rate mortgage will likely save you money. Additionally, if you think your income will not change, a fixed-rate mortgage offers the security of always knowing that the mortgage principal and interest payment will stay the same. Although you should be aware that taxes and insurance can change over time and if they are part of your mortgage payment, they can increase it.

If you're confident your income will increase steadily over time and you want to qualify for a larger mortgage, an adjustable-rate mortgage may make sense. ARMs usually start with lower interest rates – and that means lower monthly payments. But keep in mind that ARM interest rates can go up over time – and so can your payments.

When considering an ARM, ask yourself:

• If the mortgage rate increases, can you afford a higher mortgage payment?
• Do you plan to live in your home for less than 5 to 7 years?

You may also want to look at mortgage rate trends. While no one knows for certain what mortgage rates are likely to do in the future, it is worth understanding why they move and how they have moved recently when considering an ARM.