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Although you could choose one from the several types of mortgage to finance your home, the two most common types that homebuyers go with include the adjustable rate mortgages (ARM) and the fixed rate mortgage. Based on several key factors, one could make more sense than the other for you.

Fixed Rate vs. Adjustable Rate Mortgage

With a fixed rate home loan, your monthly home loan payments would remain the same over the loan term. With an ARM, your payments might be fixed for the initial years and then become adjusted according to market interest rates’ fluctuations and limits of your loan product.

When deciding between these two home loan types, among the most critical factors to consider is how long you intend to stay in your new house. An ARM might be more beneficial if you want to live in your house for a couple of years and the move again since your interest rate during that time would be significantly less than if you’d chosen a fixed rate loan.

If you’re leaning towards an ARM, however, you might want to think about the worst case situation such as having ample savings and/or income you could turn to when your interest rates rise. This means that if you have sure plans to buy and then sell your house within seven years, says that a fixed rate loan might be the wiser choice.

Lastly, think hard about the amount of “risk” you could comfortably afford. You might easily afford the fixed rates on an ARM for the first few years. However, if the monthly max possible repayment amount (as determined by caps on how much it could change) is too high for you, then it’s better to go with a fixed rate home loan.

Which Mortgage is Best for You?

To sum up, answer the following questions as truthfully as you can:

  • How much monthly repayment could you comfortably afford today?
  • Are you planning on living in your new house for a long time or not?
  • Would you have enough money to repay your monthly payments when the interest rate on your ARM rises?
  • In what direction is the current interest rates heading and is it expected to continue?

Put simply, an adjustable rate mortgage might be the most sensible option if you currently need lower payments and don’t really want to live in your house long enough to feel the inevitable rise of interest rates. Otherwise, if the interest rates are rising steadily and you need a more predictable monthly mortgage payment, then the wiser option is a fixed rate home loan.

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