When shopping for a mortgage, you may have come across the terms “fixed rate” and “adjustable rate.” But what’s the difference, and which one is the best option for you? Here’s a breakdown of the pros and cons of fixed and adjustable interest rate mortgages to help you make an informed decision.
Fixed Interest Rate Mortgages
With a fixed interest rate mortgage, the interest rate remains the same throughout the entire term of the loan. This means that your monthly mortgage payments will also remain the same.
Pros:
Predictability: With a fixed interest rate mortgage, you know exactly what your monthly mortgage payments will be for the entire term of the loan. This can make budgeting easier and can provide peace of mind.
Stability: Because the interest rate is fixed, you don’t have to worry about it going up and increasing your monthly mortgage payments. This can be especially important if you’re on a tight budget.
Cons:
Higher interest rates: In general, fixed interest rate mortgages have higher interest rates than adjustable rate mortgages. This means that you may end up paying more in interest over the life of the loan.
Inflexibility: If interest rates drop significantly after you take out a fixed interest rate mortgage, you may be stuck with a higher rate than what’s currently available.
Adjustable Interest Rate Mortgages
An adjustable interest rate mortgage, also known as a variable rate mortgage, has an interest rate that can change over time. The interest rate is typically fixed for a certain number of years (such as 5, 7, or 10) and then adjusts periodically based on market conditions.
Pros:
Lower interest rates: Adjustable interest rate mortgages often have lower interest rates than fixed rate mortgages, at least initially. This means that you may be able to get a lower monthly mortgage payment in the short-term.
Flexibility: If interest rates drop significantly after you take out an adjustable interest rate mortgage, your monthly mortgage payments could go down.
Cons:
Uncertainty: With an adjustable interest rate mortgage, you don’t know exactly what your monthly mortgage payments will be in the future. This can make budgeting more difficult and can create uncertainty.
Risk of rising interest rates: If interest rates go up after you take out an adjustable interest rate mortgage, your monthly mortgage payments could increase significantly. This can be especially risky if you’re on a tight budget.
Which is Right for You?
Ultimately, the decision between a fixed and adjustable interest rate mortgage will depend on your personal situation and financial goals. If you value predictability and stability, a fixed interest rate mortgage may be the right choice for you. On the other hand, if you’re willing to take on a bit more risk in exchange for potentially lower monthly mortgage payments, an adjustable interest rate mortgage may be worth considering.
Before making a decision, it’s important to carefully consider your financial situation and to speak with a mortgage lender or financial advisor. They can help you weigh the pros and cons of each type of mortgage and determine which option is the best fit for you.