How the interest rate is set is the most basic way to tell the difference between the different types of mortgages you can use to buy a new home. There are two main types of mortgages: ones with fixed rates and ones with rates that change over time. If you choose a fixed-rate mortgage, the interest rate you pay stays the same over the life of the loan, no matter what happens to interest rates in general. In a mortgage with an adjustable rate, the interest rate is changed every so often based on an index that goes up and down with the economy. Both have pros and cons, so there is no simple answer to the question, "Which is better, a fixed-rate mortgage or an adjustable-rate mortgage?"
A fixed-rate mortgage is best because it gives you stability. Since the interest rate stays the same for the whole loan, you know how much you'll have to pay each month. Your mortgage payment will always be the same amount each month. On the other hand, the interest on a fixed-rate mortgage is likely to be higher than that on an adjustable-rate mortgage because the lender gives up the chance to raise interest rates if interest rates rise in general.
People who plan to stay in their home for a long time should get a fixed-rate mortgage loan. Even though the first payments might be bigger than with an adjustable rate mortgage, spreading them out over a longer period of time can help you keep your budget in check.
A rate that changes over time to match the rise or fall of standard interest rates is called an adjustable rate. In most cases, the adjustable term is one year. This means that the lending company has the right to change your mortgage's interest rate once a year based on a certain index. Adjustable-rate mortgages make the most sense when interest rates are going down. However, it's risky to count on interest rates going down for a long time.
Lenders often offer mortgages with a "teaser" interest rate that is very low for the first year. The interest rate on your mortgage, on the other hand, can go up a lot after the first year. Still, there are limits to how much a rate that can change can change. This depends on the index you choose and the loan terms you agree to. You could take out a loan with an adjustable rate of 2.3% for one year that changes to a 4.1% adjustable rate mortgage after the first adjustment.
At last, a new kind of loan has come to town. "Delayed adjustable" mortgages are a cross between adjustable rate mortgages and fixed rate mortgages. You basically lock in a fixed interest rate for a certain number of years, like 3, 7, or 10. At the end of that time, the loan becomes a 1-year adjustable rate mortgage based on the terms you agreed to when you signed the loan agreement with the mortgage company or bank.
