ARM or Fixed-Rate Home Loan?

One decision you'll have to make as you compare home loans is whether to opt for a fixed-rate or adjustable-rate mortgage. We'll explain the pros and cons of each here.

Adjustable-Rate Mortgages (ARMs)

Adjustable-rate mortgages have fluctuating interest rates and payments. The interest rate is usually tied to an index that changes according to market conditions. As you compare home loans, keep in mind these benefits of an ARM:

• Lower rates and payments early in the loan's term. As a result, you can buy more home than you could with another loan.
• Take advantage of declining interest rates without having to refinance.
• Save and invest more. You can take the money you save with your ARM payment and put it in a high-yield investment.
• Inexpensive way to buy a house for those who don't intend to stay in the home long.

On the other hand, you will also find when you compare home loans that ARMs have their share of drawbacks, including:

• Interest rates and monthly payments can rise substantially over the life of the loan.
• ARMs can be hard to understand.
• It can be difficult to budget and plan with the fluctuating payments of an ARM.

Fixed-Rate Home Loans

With a fixed-rate home loan, you get a stable interest rate and unchanging monthly payment for the life of the loan. Here are some benefits of fixed-rate mortgages to consider as you compare home loans:

• Interest rate and payment stay constant.
• Consistency makes budgeting and planning much easier.
• Easy to understand, good for first-time homebuyers.

The drawbacks of fixed-rate loans include:

• You must refinance if you want to capitalize on declining interest rates.
• Might be too expensive for some homebuyers.
• Very similar from lender to lender. Whereas ARMs can be tailored to the individual borrower, fixed-rate home loans are pretty much all the same.

There is a good chance that you do not know how all of the home mortgage terms, so we have provided a home loan dictionary for your convenience.