# Fixed Rate Mortgage Vs. Adjustable Rate Mortgage

The following article will help you in determining which mortgage out of the fixed and adjustable mortgage rate, you should choose - as per your needs.

Foram Mehta

**between a Fixed Rate Mortgage and an Adjustable Rate Mortgage is its interest rate. The rate of interest in a Fixed Rate Mortgage is fixed for the entire repayment term and the rate of interest on an Adjustable Rate Mortgage is fixed for a small period and is then fluctuating depending on the current credit rates in the market.**

*major difference*Fixed Rate Mortgage

Advantages

1. The amount to be paid every month is fixed. This helps the debtor to plan his expenses and budgeting.

2. Fixed rate mortgages also protects the debtor against the fluctuation in the interest rates as the rate of interest is constant throughout the repayment period.

2. Fixed rate mortgages also protects the debtor against the fluctuation in the interest rates as the rate of interest is constant throughout the repayment period.

Disadvantages

1. If the rate of interest goes down in the future; you still end up paying a higher rate of interest.

2. The monthly paid amounts are usually high.

3. The rate of interest charged are usually high as, you are paying a price to protect yourself against the future hike in the rate of interest for over a period of 15-30 years.

2. The monthly paid amounts are usually high.

3. The rate of interest charged are usually high as, you are paying a price to protect yourself against the future hike in the rate of interest for over a period of 15-30 years.

Adjustable Rate Mortgage

The most commonly used indexes in the US are:

2. London Interbank Offered Rate

3. 12 Month Treasury Index

4. Bank Bill Swap Rate

5. National Average Contract Mortgage Rate

6. Constant Maturity Treasury

There are three ways of applying the index to the rate of interest.

**1. Directly**

Under this way of determining the rate of interest, the interest rate changes as per the changes in the index. Normally, the contract rate index is applied directly.

**2. On a Rate + Margin**

In this case, the rate of interest will be specified as index plus a margin.

For example: The rate of interest would be specified as MTA (Month Treasury Average Index) + 1%. This 1% is the margin.

**3. Indexed Movement**

In this way of applying index rate, a rate on the mortgage is fixed and is then adjustable depending on the movement of the index. Here the rate of interest is not tied to the index but the adjustments in the index are.

Advantages

1. One main advantage in considering the Adjustable Rate mortgage would be benefiting from the lowering rate of interest.

2. Another advantage is that, the initial rate of interest is usually lowered by the bank; considering the risk you are taking, if the rate of interest increases in the future.

2. Another advantage is that, the initial rate of interest is usually lowered by the bank; considering the risk you are taking, if the rate of interest increases in the future.

Disadvantages

1. A major disadvantage is that, if the rate of interest increases in the future, you end up paying a higher rate of interest.

2. You are not protected from the fluctuations in the credit market as your rate of interest change accordingly.

2. You are not protected from the fluctuations in the credit market as your rate of interest change accordingly.

Which Loan Should You Opt For?

*You can Opt for an Adjustable Rate Mortgage if*...

1. You are willing to take the risk of increase in the rate of interest.

2. You are looking at the lower rate of interest charged in the initial period of the loan.

3. If you are okay with the changing annual payments.

4. If you do not qualify for higher rate loan programs, then this could be a good option.

*You can Opt for a Fixed Rate Mortgage if*...

1. You are willing to protect yourself against the increase in the rate of interest in future.

2. If you are looking at a fixed repayment amount and period.

1. Amount and period of the loan

2. Current economic conditions

3. Future economic changes

4. How much are you willing to pay each month?

5. Are you looking at stability in terms of payments or are you looking at benefiting from the changes in the market conditions?