Mortgages Part 4B: What are Fixed Rate and Adjustable Rate Mortgages?
All mortgage loans fall into either one of two categories: fixed rate mortgages and adjustable rate mortgages.
What is a fixed rate mortgage?
When you get a fixed rate mortgage, the interest rate will remain the same throughout the loan, and your mortgage payment amount will never change. It is usually a good idea to get a fixed rate mortgage if:
- You are buying when interest rates are ‘historically low’.
- You plan to stay in your house for a long time, at least for over five years, and you do not want to face the potential shock of a higher mortgage payment if the interest rate goes up.
What is an adjustable rate mortgage (ARM)?
An adjustable rate mortgage is a loan where it starts with an initial fixed rate period, followed by a much longer period where the interest rate changes periodically. During the initial fixed rate period, the advantage is that the rates will be lower than what you can get for a fixed rate mortgage. You may want to consider an adjustable rate mortgage if:
- You probably will move in a few short years, which means you may sell your house before the rates readjust. This will allow you to enjoy the lower payments during the initial years of the loan
What is a hybrid mortgage?
You may hear the term "hybrid mortgage", which is a mix of fixed rate and adjustable rate. It works just like an ARM, but with a longer fixed rate period of usually 3, 5, and up to 10 years. (While some ARM only have a fixed rate period of one year) Adjustable rate mortgages are often referred to as 3/1 or 5/1, and so on. The first number is the length of the fixed term, and the second number is how often the loan readjusts after the fixed term. So with a 5/1 hybrid, the interest rate is fixed for the first 5 years. After that, the interest rate will change every year.
Mortgage Guide Home | Previous Article: Types of Mortgages | Next Article: Full Doc and Stated Income Loans
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