FIXED V. ADJUSTABLE
When you arrange financing for your new home, you'll probably have to consider a fixed rate mortgage or an adjustable rate mortgage. There are pros and cons to each, and your consideration will always allow for the current interest rates as well as the forecast.
Adjustable rate mortgages carry and element of risk. If interest rates go up, the mortgage payment will increase.
The payment on a fixed-rate loan stays the same irrespective of the rates. The downside is that if the interest
rate falls, the payment on a fixed-rate loan will not. An adjustable rate mortgage payment will decrease if interest
rates decline.
If you plan to stay in the home for a relatively short period, say five years or less, an adjustable rate mortgage
might be a good gamble, even if rates rise. Adjustable loans have a ceiling on the maximum interest rate over the
life of the loan. The lifetime cap should be stated as the maximum interest rate, and not as the maximum increase
or change.
A buyer who doesn't have the financial ability to carry the mortgage on a desired property might be able to switch
to adjustable -rate financing to make qualifying easier. Lenders usually use the maximum possible interest rate
to qualify buyers for an adjustable-rate mortgage. This insures that the buyer will be able to cover the maximum
mortgage payment allowed by the terms of the loan in the event interest rates increase.
When you're choosing between fixed-rate and adjustable-rate loans, be clear on all your options. Talk to the lender
about what will work best, given your budget, and both short-term and long-term plans.