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Mortgage - ARM Vs Fixed Rated

By Expert Author: Michael Russell Platinum Expert Author
Word Count: 579 words | Views: 398 view(s)
For anyone thinking of buying a home, the age old question has always been, what do I get, a fixed rate mortgage or an adjustable rate mortgage or ARM? The truth of the matter is, either mortgage that you get is a gamble and ultimately you have to decide on which end of the gaming table you want to play. We're going to give you the pros and cons of each as well as the benefits and then hopefully from this information, you can make an informed decision.

First thing we have to do is define what each type of mortgage is. An adjustable rate mortgage, or ARM, is a mortgage that changes over time. In other words, when you first get your mortgage it may be, say, 7%. Then, one year later, that mortgage could go up to 8% or it could go down to 6% or any number in between, above or below. There is usually no ceiling or floor to how high or low an adjustable rate mortgage can go.

A fixed rate mortgage is just that. When you take our your mortgage, say on January 1, 2006, for 30 years and the mortgage rate is say, 6%, 30 years later when you're about ready to pay off that mortgage, it is still only 6%. In all that time it neither went up or down. That is why it is called a fixed rate mortgage.

Okay, so why would a person choose one over the other? Well, that depends on a number of factors, almost all of which are out of each person's control, though some are affected by the person's economic situation.

Initially, what is attractive about an ARM is that it is usually a lower rate than a comparable fixed rate mortgage at that particular time. For people who are in a tight financial situation and maybe just barely qualify for a mortgage, this is an attractive option because initially anyway, they are saving some money on their monthly payments because the rate is lower than a fixed rate mortgage at that time.

The problem with this approach is this. If economic indicators show that interest rates are on the rise, then as time goes on, this attractive interest rate can actually balloon into a rate that is much higher than the fixed rate mortgage you could have gotten at the same time. So while on January 1, 2006, you could get an ARM for 6% while the fixed rate mortgage is 7%, by January 1, 2009, that ARM could have gone up to 9% or even higher depending on how high interest rates have gone.

In other words, it's a gamble. Many people actually choose a fixed rate mortgage because they feel that interest rates ARE going to be on the rise. Then something happens and the rates actually start to drop. Now their fixed rate mortgage, which looked so good two years ago, is two or three points higher than the same fixed rate mortgage at that time. Sure, they can always refinance, but that has a cost to it too and is a royal pain.

Choosing a mortgage is a gamble. Make no mistake about it. The best thing to do is choose your poison and learn to live with the results, whatever they are.
Michael Russell

About the Author: Platinum Expert Author

Michael Russell
Your Independent Mortgage guide.

Article Source: http://www.articlesphere.com/Article/Mortgage---ARM-Vs--Fixed-Rated/45651

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