Benefits of Fixed Rate Mortgage
If interest rates increase, your mortgage and your mortgage payment won't be significantly affected. Even if your taxes or insurance costs go up over time, your basic loan payment (principal and interest) will stay the same. This is especially helpful if you plan to own your home for five or more years.
You know what your monthly housing expense will be for the entire term of your mortgage. This can help you plan for other expenses and set long-term financial goals for yourself and your family.
You always know what your payment will be, regardless of what current interest rates are. This is why fixed-rate mortgages are so popular with first-time buyers.
There are additional considerations to be aware of with fixed-rate mortgages:
Your mortgage interest rate won't go down, even if interest rates drop, unless you refinance your mortgage.
Because the interest rate is generally higher than other types of mortgage loans, you may not be able to qualify for as large a loan with a fixed-rate mortgage.
Adjustable-rate mortgages (ARMs) are popular because they usually start with a lower interest rate and a lower monthly payment. The lower rate (and lower monthly payments) may also allow a higher loan amount. However, the interest rate can change during the life of the loan, which would mean that your monthly payment would increase (or decrease). These mortgage loans are typically uncommon. It's important to understand the specifics of an adjustable-rate mortgage, commonly called an ARM:
All ARMs have adjustment periods that determine when and how often the interest rate can change. There is an initial fixed rate period during which the interest rate doesn't change - this period can range from as little as 1 month to as long as 10 years. After the initial period, the interest rate will often adjust each year. For example, with a 3/1 ARM, your interest remains the same during the first 3 years, and then can adjust every year following, up to a maximum amount (the "lifetime cap").
Indexes and margins.
At the end of the initial period and at every adjustment period, the interest can change based on two factors: the "index" and the margin. Interest rate adjustments are based on a published index. The rates for indexes reflect current financial market conditions, which is why your interest rates can change at each adjustment period. The margin is the amount that is added to the index to determine what your new mortgage rate will be until the next adjustment period.
Caps, ceilings, and floors.
All ARMs have rate caps, also known as ceilings and floors. Caps decide how much the interest rate can increase or decrease at each adjustment period and over the life of the loan. Most ARMs have a lifetime cap that limits the amount your interest rate can increase over the life of your mortgage.