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## Should I Get a Fixed-Rate Or Adjustable-Rate Mortgage?

The answer depends on many factors including your financial situation. Let’s look at the main differences between these two types of loans.

Fixed Income Loans

The two main components needed to compare fixed rate loans are interest and score. Points are fees paid to the lender at the beginning of the mortgage term. They are based on a percentage of the loan. Therefore, one point equals one percent of the loan. Therefore, a 100,000 mortgage with a score of 1.5 will cost $1,500.

One lender may offer a lower interest rate than another but the score may be higher resulting in an unfavorable loan. The most important thing to consider here is the length of time you plan to hold the mortgage. The longer you plan to save on a mortgage, the higher the lower interest rate makes sense. And, the less time you plan to stay in the home you can benefit from low or no points and high interest rates.

Additionally, be sure to ask your lender about all the fees involved. Lenders may charge different fees that can add up quickly.

Some common fees are:

* application fee

* credit report

* Property assessment

* title insurance

* escrow fees

Ask for an organized list of all written payments so you can compare loans properly.

Adjustable Rate Mortgage

Choosing the best mortgage rate (ARM) is impossible because there are so many unknowns. However, you can look at a few loan options and depending on your situation make a decision that you can live with.

The interest rate at which loan payments begin is called the prime rate. This rate is the most important rate to consider when looking at ARMs because it will change. The prime rate is often used as a talking point to make you think the loan has good terms.

The most important factors to consider when deciding on an ARM is the index formula and the margin equals the interest. The index is used by the lender to calculate your specific interest rate. Indexes may differ in how quickly they react to interest rate fluctuations. Other commonly used indicators are Treasury bills (T-bills) and Certificates of Deposit (CD). A margin is a fixed amount that is added to the index to get the interest. Margins are typically around 2.5 percent.

Another important consideration is the frequency at which the mortgage rate is recalculated. Some ARMs adjust monthly, while others only adjust 6 or 12 months.

Also, interest rates are used to limit the amount that may change during the adjustment period. The rate of an adjustable rate loan that adjusts every 12 months is subject to a 1-2 percent change up or down. There should also be a lifetime margin to avoid rate changes over the life of the loan which is usually about 5-6 percent higher than the original rate.

Before accepting an ARM you should find out the maximum allowable payment to see if you can handle the worst possible payment.

Finally, some lender fees should be considered with a request for a written statement of total fees.

Fixed vs. ARM payments

A fixed rate loan is just that, a fixed interest rate for the life of the loan. The payment will remain the same regardless of the fluctuation, however, the risk is that if rates drop too much you may be stuck with a higher rate.

ARM interest rates can change several times over the life of the loan, thus, changing your monthly payment. ARMs offer potential interest savings because the initial rate is usually lower than the fixed rate. Also, if rates go down or stay the same there will be more savings compared to a fixed rate loan. But, if rates rise the ARM will cost more than the fixed loan amount.

Choosing Fixed-Rate vs. Adjustable-Rate Mortgage

First, consider the risk you may be taking by changing the amount of the monthly payment. Do you have money saved? Or do you have a lot of money without emergency savings? If you cannot pay off your ARM with the maximum payment amount you should avoid this type of loan.

Also, consider how long you plan to hold. In general, ARMs are best for a 5-7 year mortgage. If you plan to keep your mortgage for the long term a fixed rate mortgage may be a better, less stressful option.

Finally, if the thought of having an adjustable rate loan stresses you out…don’t! The pressure is never worth the potential savings. Plus, if rates drop significantly you can choose to refinance at a lower rate.

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