Are all loans for a house the same? Or, if you're not careful, choosing one type of mortgage over another can get you into trouble. All mortgages are not the same. For example, an adjustable rate mortgage is different from a fixed rate mortgage.
Of course, the kind of loan you can get often depends on how good or bad your credit has been over time. Most of the time, the loan you get will depend on your FICO score. FICO stands for Fair Isaac Corporation, and your best-known credit score is calculated using a specific mathematical formula.
GMAC looks at your FICO score and tells you the difference between a fixed-rate mortgage and an adjustable-rate mortgage based on the type of loan you might be able to get. "Most mortgage loans either have a fixed interest rate or an interest rate that goes up and down over time. With a fixed-rate mortgage, the interest rate stays the same over the life of the loan, and so do your payments. The interest rate on an adjustable-rate mortgage (ARM) changes regularly, usually once a year, based on a formula that uses a market index. Most ARM options have a fixed rate for a certain amount of time, usually between three months and ten years. After that, the rate changes."
Still, you might be wondering why anyone would choose a loan with rates that change as often as the wind. There are some good reasons, like the fact that a lender may charge a lower interest rate at the start of an ARM loan than a fixed-rate loan. This will not only give you more money to spend, but it can also save you money if interest rates stay the same or go down.
It says on bankrate.com, "Your monthly payments will stay the same with a fixed-rate mortgage (FRM). With an adjustable rate mortgage (ARM), on the other hand, you usually start out with a lower fixed rate than you would with a fixed rate mortgage. After the first period with a fixed rate, there are times when the rate is changed. For example, a "3/1 ARM" has a low fixed rate for the first three years and then changes each year based on an index. 1/1, 3/1, 5/1, 7/1, and 10/1 are all common ARMs."
As a general rule, a fixed rate is a good idea if you plan to stay in your home for a long time and the interest rates are low when you buy. A mortgage with an adjustable rate is a good idea if you don't plan to live in the house for very long and the rates are higher than usual when you buy it.
