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mortgage loan agreement When you shop for a mortgage, one of the decisions you need to make is whether to choose an adjustable-rate mortgage (ARM) or a fixed-rate mortgage.  The interest rate of an ARM is usually lower than the fixed rate.  However, because of the risk that the ARM rate will increase over time, more than 75% of homeowners choose to lock in a fixed-rate mortgage.  Mortgage calculators are available to help you compare your payments with fixed-rate versus ARM mortgages.

A fixed-rate mortgage has the same interest rate for the entire term of the loan, keeping the payment stable.  This makes budgeting easier, because you always know how much your monthly payments will be.  Fixed rate mortgages are especially good for first-time home buyers and anyone on a budget who needs the stability of a set monthly repayment amount.

If the interest rate rises above the fixed rate on your mortgage, you will see the real benefits of the fixed rate mortgage:  you will be paying less than you would have with a variable rate mortgage.  However, if the interest rate decreases during your fixed rate period, you will be paying more than you would have with a variable rate mortgage.

When you are trying to decide whether to choose an ARM or fixed-rate mortgage, a major consideration is how long you plan to stay in your home.  For the first couple of years of a mortgage, the ARM rate is fixed; after that, it may be adjusted every year or every three years on the anniversary of the mortgage.  If you only plan to live in the home a few years, you can save money by taking the lower-rate ARM.

You should also consider how high your monthly payment could go if interest rates rise.  ARM rates can include initial cap, periodic cap, and lifetime cap values, which limit percentage rate increases during the life of your loan.  If the worst happens and the interest rate rises to its maximum amount, will you still be able to afford the mortgage payments?

An FHA loan, offered by the Federal Housing Administration, is insured by the United States federal government.  FHA loans are often a good choice for first-time home buyers who have little money to put down as well as those who have less-than-perfect credit.  However, borrowers must still meet certain eligibility requirements in order to qualify for an FHA loan.  Both adjustable-rate and fixed-rate FHA loans are available to potential home buyers.

A reverse mortgage is a type of mortgage that enables homeowners to turn their home equity into cash.  Instead of paying the lender, the homeowner actually receives a check from the lender each month.  The funds can be used to supplement retirement income, pay for health care, or buy long-term care insurance.  In return, the lender retains a large portion of the home's equity.  Lenders offer both fixed-rate and adjustable-rate reverse mortgage products.

For more information and pointers about selecting the best mortgage for your requirements, visit the Federal Reserve Board's Mortgage Shopping Tips article.

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Home Mortgage Types – Adjustable Rate Mortgages and Fixed Rate Mortgages

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