Adjustable Rate Mortgages Vs. Fixed Rate Mortgages

Summary

Many people have mortgages that were fixed for only 1, 2, or 3 years. Those loans are all now switching over into adjustable loans, and people are hitting by the shock of a vastly increased monthly payment.

Here's some help to understand your options.

Benefit

Adjustable rate mortgages are generally cheaper at any given time than a fixed rate mortgage. The longer a loan is fixed for the more expensive it will be. A loan that is fixed for only 1 year will likely have a lower rate than a loan that is fixed for 30 years.

This is why people opt for loans that are fixed for a short time frame and then are adjustable.

Many people who got 100% financing recently chose 2/28 or 3/27 loans where the loans were only fixed for the first couple of years.

New Loan Options

The risk of being hit by a much larger payment is what is getting people to switch into other loans, including:

• 30 year fixed

• 30 year fixed, with a 10 year interest only option

• 40 year loan

• 50 year loan

Loans with longer terms, such as 40 or 50 years, will have a lower monthly payment than a similar loan that is only for 30 years.

People can also choose a loan that is fixed for a longer time, such as 5 years, with an interest only option that allows the borrower to make a lower payment. This keeps their payment from going up too much.

Is This Loan Right For You?

Most people will not want to keep a loan that is currently adjustable. Their payment will be too high, and the uncertainty is not something many homeowners want.

There are many options out there for borrowers, but the use of an interest only or minimum payment option loan will allow a borrower to switch loans without a steep payment increase.

To figure out your payments, use our free online mortgage calculators.