What Kind Of Mortgage Loan Is Better For You: Adjustable Rate Or Fixed Rate?

Choosing an adjustable or fixed rate mortgage loan depends upon your personal financial situation. The descriptions below show how your mortgage choice may affect your finances years into the future.

Adjustable Rate Mortgage (ARM)
Just as you would expect, the rate on an ARM changes periodically to reflect market conditions. However, there is protection built in for borrowers in the form of annual and lifetime rate caps. For example, a Dollar Bank one-year adjustable rate mortgage currently offers a 2% annual cap on rate increases and a 6% cap over the life of the loan.

Initial ARM rates are generally lower than those on fixed rate mortgages, making it easier to qualify. This can be an attractive feature for first-time home buyers. It can also enable you to buy a larger or more expensive home. And, of course, you pay less interest when your rate is lower.

When should you consider an ARM?

• When you expect that your income will rise
  
• When you aren't planning to stay in your house long term
  
• If you believe that rates will stay fairly steady or decrease
  
• If you want to avoid the cost of refinancing in the future
  
• If you can handle the higher payments that could result from a rate increase

Fixed Rate Mortgage
The fixed rate mortgage is simple. The rate never changes and the principal balance is steadily reduced as you make your payments. You have the security of knowing from day one what your monthly principal and interest payment will be throughout the term, so it's easy to budget and plan for the future.

However, the rate on a fixed rate loan will generally be higher than the initial rate available on an ARM, so you will pay a price for security. And if rates fall steadily over a prolonged time you may have to pay to refinance your fixed rate loan more than once.

When should you consider a fixed rate mortgage?

• If you aren't expecting significant income increases
  
• If you plan to stay in your home a while
  
• If you believe that rates will increase
  
• When you have other financial obligations that would make a payment increase difficult to handle
  
• If you feel more comfortable knowing that your rate and payment won't change

A Dollar Bank Representative will be happy to discuss mortgage options with you.

To try our mortgage calculators, click here .

The information presented in this publication is general in nature and it is not our intention to provide specific advice to individuals or a comprehensive discussion of the subject matter. We suggest that you consult with your financial or tax advisor, accountant or attorney to obtain specific advice or comprehensive information.