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When searching for a home loan, one of the decisions you'll have to make is whether to go with a fixed mortgage or an adjustable mortgage. You'll want to base your decision on a number of factors. Your financial situation is a determining factor as well as your goals of home ownership. This article will examine the pros and cons of a fixed rate loan and when you would might be better off with a different type of loan.

What Is A Fixed Rate Loan?

A fixed mortgage or fixed rate loan is a type of mortgage whereby the interest rate of the loan stays the same throughout the life of the loan. So for example, if you secure a fixed rate loan for 30 years at 7% interest, the interest rate will remain at 7% even if interest rates soar or drop. The same would hold true for a 15 year loan or how ever many years the loan is for.

An adjustable rate loan on the other hand, is a loan whose interest rate will vary over time at a rate agreed upon by you and your lender. There are situations where this is a great idea, for example, you may be able to secure a loan at below market rates for a term of perhaps a year. Great if you know the rate is going to go up, and you are prepared for it. Many first time home buyers opt for this type of arrangement because of the lower payments for the first year. They can get their finances in order, and adjust accordingly as the rate rises.

Who Is A Fixed Rate Loan Perfect For?

Many home buyers when faced with the arm vs fixed mortgage go with a fixed mortgage just for the security of a fixed payment. They are able to budget a mortgage payment each and every month for 30 years (for example) and know that is never going to change. This actually is a very good reason to go with a fixed rate.

If your homeowner goals are to plant roots, stay in one place for a long time, a fixed rate mortgage is probably your best bet. You can stay in one place knowing your last mortgage payment will be the same as your first. If you don't plan on staying in one place too long though, you would probably be ok with an adjustable rate mortgage. If you are out of the house in 3 years for example, you may get by paying a low rate before the higher rate kicks in.

Your parents probably had a 30 year fixed rate mortgage. This type of loan was the most common as folks didn't move around too much, and frankly, there were not as many options available at that time.

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