Tuesday, January 08, 2008 10:09 AM
What's the difference between a fixed rate vs. ARM mortgage?
There are two basic types of mortgages: fixed rate and adjustable rate. Fixed rate mortgages have interest rates that stay the same throughout the loan's life
(usually 15 to 30 years).
Adjustable rate mortgages (ARMs for short) have interest rates that vary over the course of the loan. Sometimes the rate varies every six to 12 months, and sometimes it varies every month. Usually, your ARM's interest rate will be tied to an economic index, such as the going mortgage rate. When rates are high, your rate will be high (not good). When they're low, yours will be low (very good).
There is one other type of loan: hybrid mortgages. These begin as fixed rate loans (for up to 10 years), then convert to ARMs.
If you're buying a home when interest rates are considered "historically low," it may be wise to choose a fixed rate mortgage. If interest rates are high and you think they will decline, you may want an adjustable rate mortgage. Of course, it's not that simple. Check out these websites before making the big decision: QuickenLoans.com; MortgageMart.com; Mortgage101.com; and IrwinMortgage.com.