Fixed vs. adjustable interest rates
When you're buying a home, you'll want to investigate different types of mortgages, including fixed-rate, adjustable-rate, hybrid, which combine elements of fixed- and adjustable-rate loans, and balloon mortgages. Each type has some real advantages and some potential drawbacks.
| Type of Mortgage | Advantages | Cautions |
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| Fixed-rate mortgage | - Your interest rate and monthly payments are fixed for the term. That means you can budget exactly how much your housing costs will be each month.
- Your payments won't increase even if interest rates go up.
| - If interest rates go down, your payments will remain the same — you'll have to refinance to benefit from the lower rates.
- Your interest rate and closing costs may be higher than they may be with an ARM.
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| Adjustable-rate mortgage (ARM) | - ARMs have lower initial rates, which means it may be easier to qualify for a loan, since your monthly payments will be lower.
- If interest rates go down, your mortgage payments will probably drop.
| - If interest rates go up, your payments will probably increase.
- The changing monthly payments may make it difficult to budget for housing costs.
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| Hybrid loans(Fixed for a number of years and then adjustable) | - You can usually get a lower rate on the fixed-term portion of the loan than if the rate were set for the entire 15 or 30 years.
- The lower rate also means it may be easier to qualify, since your monthly payments will be lower.
- If you plan to move before the loan adjusts, you don't have to worry about interest rates going up.
| - When the fixed-rate period ends and the loan becomes an ARM, your payments will reflect the current rates. If interest rates increase, your payments may increase.
- The changing monthly payments may make it hard to budget for housing costs. In most cases, the interest rate on an ARM is adjusted once a year, though some may change more often.
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| Interest-only loan or Balloon mortgage | - For a fixed term, usually five to seven years, you pay only the interest on the loan in monthly payments that are smaller than the average mortgage payment.
- Smaller payments may allow you to afford to purchase a home, or to buy a more expensive one.
| - The final payment will likely be much larger than the monthly payments you made.
- In some cases, the entire principal is due in the last payment, or balloon payment. You can then refinance at current rates, pay the balance in a lump sum or start paying off the principal, in which case your payments will increase.
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