Comparing Mortgage Types

Let's find the one that's right for you

Too many home buyers choose a mortgage type based on some vague notion that "FRMs are safer" or "the monthly payments on an ARM are lower". But it's a mistake to do this. When choosing a mortgage, it's important to take a look at every aspect of your situation.

This page:

  • Makes clear the difference between fixed and adjustable rates

  • Compares the benefits and disadvantages of each type

  • Helps you decide which type of mortgage rate is right for you

Over the next few pages, we'll take a look at 15-year FRMs, standard and hybrid ARMs, and some special mortgages for those with particular financial needs.

How do fixed and adjustable rate mortgages compare?

Deciding whether to go with a fixed or adjustable rate loan is probably the most important decision you'll make about your home mortgage.

Your credit history, recent interest rates, current and future employment, financial situation, and family's living plans should all affect this important choice. Here's how:

  • The current mortgage rate environment at the time you're shopping for your loan is a huge factor. If rates are low, an FRM allows you to lock into a low monthly payment that won't change even when interest rates do. If rates are high, an ARM allows you to reap the rewards of a future rate free-fall.

Even if rates are incredibly low, don't make the mistake of thinking interest rates are your only concern, because there are a few other factors to consider.

  • The length of time you spend in your new home is a big one, too. If you remain in the same house for the life of its mortgage (15 or 30 years) you are almost always be better off with a fixed-rate mortgage. Overall interest costs are usually lower than they would on a similar ARM, and you have the budgeting security of payments that always stay the same.

However, most homeowners won't stay in one house for the full duration of a mortgage. The average American family actually moves every eight years.

So for half the population, an ARM with an initial low interest rate may be just the ticket. Many lenders offer combination fixed/adjustable rate mortgages with an initial fixed rate period of 1, 2, 3, 5, or 7 years. But there's even more to think about.

  • Your credit history and profile affects your ability to qualify for any loan, including certain types of mortgages.

If your credit history is poor or you're carrying a lot of consumer debt, an ARM probably allows you to spend more on your new home. Lenders generally approve higher mortgage amounts on adjustable rate mortgages. And because an ARM is often kept by the company that funds it, rather than being sold, lenders can be more flexible about other special circumstances you may have.

and, finally:

  • Your spending capability should influence your choice of mortgage. An FRM,(especially a 15-year loan) can be a great bargain for a buyer with a large monthly housing budget.

On the other hand, an ARM may be a good option if you expect your salary to rise dramatically in the next few years. You'll be able to borrow more now at a low initial rate and if the interest rises in the future, your higher income will allow you to meet payments (or more easily afford to refinance).

(But don't rashly choose a large ARM based only on the assumption you'll have more money in the future. If rates rise dramatically and your salary doesn't, it will be difficult to meet your payments.)


Next: A look at 30-year fixed rate mortgages.

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