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Fixed Vs. Adjustable

The choice between a fixed rate and an adjustable rate can be quite confusing.  Hopefully this will help make the decision easier:

What's the difference?

A fixed rate mortgage is just that...  fixed.   What this means is that your interest rate never changes through the life of your loan.  Which in turn means that your mortgage payment does not change.  There are no surprises and no uncertainty. 

On the other hand, an adjustable-rate mortgage has an interest rate that fluctuates.  The interest rate typically adjusts every six to twelve months, but it may change as often as every month.  The interest rates of this mortgage are determined by what's happening overall with the economy. 

So what are the pros and cons of each mortgage?

  • Your mortgage payment and interest rate is fixed.
  • You will pay a premium (a higher interest rate) so the lender will commit to lending you the money for a fixed period of time.
  • If interest rates fall significantly, you maintain your current rate (unless refinancing is an option.)
  • There are sometimes prepayment penalties on fixed rate mortgages.
  • An adjustable-rate mortgage starts out at a lower interest rate and may allow you to qualify for a higher loan amount. 
  • Your principal and interest payments are lower.
  • If your loan has no prepayment penalty you can refinance into a fixed mortgage at a later time.
  • It is difficult to budget your bills because your mortgage may change month to month.
  • If rates rise more than 1 or 2 percent and stay elevated, your adjustable-rate loan will probably cost you more than a fixed-rate. 

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