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The Mortgage Bankers Association (MBA) recently made a preemptive strike against what it obviously perceives as the next threat against the mortgage industry - "suitability standards." Read more...

 

Differences Between Fixed And Adjustable Rate Mortgages

Basically there are just two kinds of regular mortgages available: an ARM and a fixed-rate mortgage. In mortgage terms, an ARM refers to an "adjustable rate mortgage".

The difference between the two kinds of loans is very simple; with an adjustable rate mortgage, the amount that you repay each month can vary over a period of time. With a fixed-rate mortgage, you know exactly how much you will be paying each month for the entire period of your mortgage loan.

For instance, a fixed rate mortgage of $350,000 you may have a monthly payment of $2,030 at 5.7 percent. With an adjustable rate mortgage for the same amount, you may only be paying $1,620 at 3.75% per month which represent significant savings.

So therefore, it would seem obvious that taking out an adjustable rate mortgage is the best deal and that's the one people should choose. The truth is that it looks great on paper but in the real world it can be very different.

You have to keep in mind that ARM stands for "adjustable rate mortgage" meaning that your monthly payments could go down but just as easily they can increase. If that same mortgage went up by three percent for example, over a period of five or six years, this would increase the monthly payment to $2,507. In this case, the fixed rate mortgage looks a lot more attractive.

Quite often, mortgage companies will offer what are known as the "teaser" rates, meaning that for the first couple of years, the mortgage payments will be at a very low interest rate and therefore very low monthly payments.

But these adjustable rate mortgage payments could and most likely will, jump up considerably after the first couple of years, and could also be made worse by an increase in interest rates. These two factors could possibly make the payments too large for the average homeowner to handle.

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