Fixed Rate vs Adjustable Rate

A fixed rate loan is one in which the interest rate remains the same for the entire term of the loan.  A fixed rate loan would allow the borrower to "lock in" the rate for the life of the loan and not be concerned with interest rate fluctuations.

These loans allow the borrower to know what their principle and interest payment would be for the life of the loan.  This loan is ideal for people who plan on being in their home for an extended period of time or do not want to worry about fluctuating interest rates.

Fixed rate loans, depending on the loan program (VA, FHA, ect), can have terms as long as 30 years and as short at 5 years.

An adjustable-rate mortgage differs from a fixed-rate mortgage in many ways.  Most importantly, with a fixed-rate mortgage the interest rate remains the same for the life of the loan. With an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.

To compare two ARMs, or to compare an ARM with a fixed-rate mortgage, you need to know about indexes, margins, discounts and caps on rates and payments. You need to consider the maximum amount your monthly payment could increase. Most importantly, you need to know what might happen to your monthly mortgage payment in relation to your future ability to afford higher payments.

There are many kinds of adjustable rate mortgages and most tend to have interest rates lower than a fixed rate mortgage.  These mortgages can sometimes work well for a borrower that will not be in their home for an extended period of time.  They may also be a good alternative when fixed rates are high.

Adjustable rate mortgages are not for everyone and should be discussed at length with Kim.  It is important that you understand how the loan works and what to expect in the future.