Home Mortgage Interest Rates: Fixed and Variable

When buying your home, one of the first big decisions youll have to make is whether to go for a fixed rate or an adjustable rate mortgage (ARM). Before knowing which is best for you, however, you need to be aware of how each one works.
A Home Mortgage with Fixed Rate Interest
To put it simply, the interest rate of a fixed rate home mortgage is unchanging. This rate is frozen for the term of the loan, meaning that your rate will stay the same no matter what happens to interest rates over the term of the loan. Oftentimes, new buyers decide to use a fixed rate home mortgage, as this kind of loan is easier to plan for in the long term. As the interest rates you are paying on your home mortgage are always the same, so are your mortgage payments. This means that if you purchase a home for $175,000 at rate of 6.5% for 30 years, your monthly home mortgage payments will stay at $1106 (excluding any escrow costs), and never deviate during the course of the term.
There are pros and cons to singing up for a fixed rate home mortgage. While you will always be able to depend on a fixed mortgage payment (excluding property tax and insurance), you will typically have a higher interest rate than if you used an ARM. This is because banks are generally taking on more risk with fixed rate loans, and so charge you more for keeping a frozen rate for the duration of your home mortgage.
Adjustable Rate Home Mortgage
An adjustable rate home mortgage (ARM) "floats" or fluctuates with changes in interest rates. Typically, adjustable rate mortgages begin with a short period in which the rate is fixed (usually 3 to 10 years). After that time, the rate will adjust at predetermined intervals. During a period of rate adjustment, your home mortgage rates will rise or fall depending on what is happening in the index your rate is connected to. Simply put, if rates go up, your home mortgage payments will go up as well.
Normally, an adjustable home mortgage rate will start off lower than a comparable fixed rate for a 30 year mortgage. But if interest rates go up, your payments will go up. To reduce some of that risk, many ARMs come with a rate cap, allowing your rates rise only a specified number of percentage points.
The key to choosing the right loan for you is knowing how long you will be in your home and understanding your tolerance for risk. If you plan to stay in your home only a few years, its possible for you to save money by choosing an adjustable rate home mortgage with a lower fixed rate for the first few years of the loan. Youll be out of the house before the rate ever adjusts. If you plan to stay in your home a long time and do not want to deal with changing interest rates, a fixed rate option might be best for you.

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