Fixed vs. Adjustable Mortgage Rate

Definition

Comparing fixed vs. adjustable mortgage interest rates is a common step if you are shopping for home loans: A fixed interest rate will stay the same throughout the life of the loan, while a variable rate can shift through time.

Quick Summary

Are you ready to dive into loan comparison? Comparing the different kinds of rates you can get is common practice, but can be confusing for first-time shoppers. A fixed interest rate stays the same throughout the life of the loan, which means that your monthly payment will stay unchanged until the loan is paid off. It starts a little higher, but will never change. An adjustable rate starts much lower, but has the ability to increase over time (usually within a set amount, and only a set number of times). Adjustable rates are often tied to market conditions and indexes, and as those increase your interest rate can also rise, increasing your monthly payments over the years – however, there is also a possibility of the rate actually decreasing over time.

Which is better? It all depends on the current market and your unique financial situation. Fixed rate loans are praised for being more dependable and often saving more money throughout the total life of the loan. Adjustable rates, meanwhile, offer more uncertainty but help you save more money early on in the life of the loan.

Pros and Cons

Pros

-An excellent tool for making financial decisions. Take a close look at the amortization information for both loan options, and note any reliable predictions for how the adjustable rate will change over time. This can help you choose the loan option that will save you the most money with the least amount of hassle.

Cons

-There's not always a "best" option. Lenders choose both fixed rates and adjustable rates to help guarantee a certain return on interest payments, based on very careful models. Unfortunately, that means that there may not be a best option for you as a borrower, especially if there are too many unknowns in your financial future.

What Else Should I Know?

Keep in mind that there is not a single rate for all fixed loans and a single starting rate for all adjustable loans. They both come in many different varieties, based on your personal financial information, underwriting, and market conditions. Adjustable rates in particular can increase at varying speeds with different rules for how they change. Always take the necessary time to research and compare loans before making a decision!