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When it comes time to select a new mortgage, you will be choosing from mortgages that fall into one of two categories - fixed rate mortgages(FRM) and adjustable rate mortgages(ARM). The main difference between these two types of mortgages is that the interest rate on an ARM is tied to an index that will fluctuate with market conditions while the interest rate on a FRM will be the same for the life of the loan. Let's take a quick look at the pros and cons of a fixed rate mortgage. Pros Your payments will remain stable over the life of your loan. While the major financial indexes will continue to fluctuate from month to month, your rate and payment will remain locked in. As long as you continue to pay your loan on time, your mortgage payment will not change. No surprises. As the interest rate on your FRM does not change, your payment will be constant. You will be protected from the potential rising mortgage payment that those with an ARM can face from month to month. Because you know what the payment on your mortgage will be for the life of your loan, it is easier to budget the payments for a fixed rate mortgage. Cons The payments on a FRM are typically higher than the payments on an ARM. This is especially true in the first few years as many adjustable rate mortgages have teaser rates that are substantially lower than the fully indexed rates. The higher payments that come with a fixed rate mortgage typically require the borrower to show more income than the payments on an adjustable rate mortgage. Should interest rates decrease, you will need to refinance your FRM to enjoy the benefits of those lower rates. Fixed rate mortgages typically have a higher interest rate than adjustable rate mortgages. In order to protect themselves from loosing future interest revenue if rates increase, mortgage lenders lock in future profits by attaching higher rates to fixed products. If you plan on refinancing or selling your home in the next 5-7 years, you will be paying for the long term security of a FRM when an ARM could have provided you a lower rate, and lower payments, over the same term. You should always speak with a mortgage professional when trying to determine the best mortgage for your situation. A mortgage professional can help you determine the pros and cons of each type of mortgage and help you weigh those against your unique needs. While on the surface, a fixed rate mortgage might seem like the best option, frequently, an adjustable rate mortgage will allow you to meet your needs and help you achieve your financial goals faster than if you were devoting more of your income to a fixed rate mortgage.
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