Mr. Stability: Fixed Rate Mortgages

This mortgage option gives you a fixed mortgage rate, and hence a consistent payment amount every month.  This is historically the standard type of mortgage loan in the US.  The up side of taking this fixed rate is that when the interest rate goes up, you don’t have to worry; when the interest rate drops, you are always free to refinance. However the down side is that the fixed rate is usually a bit higher than the adjustable rate. For a more complete biography of Mr. Stability, click here.


Mr. Unpredictable: Adjustable Rate Mortgages

Also known as Variable or Floating Rate Mortgage, this option allows your mortgage rate to adjust as the interest rate fluctuates. This is considerably riskier than the Fixed Rate Mortgage because a small change in the interest rate can result in a big change in your monthly payment amount because of compound interest. People who prefer Adjustable Rate Mortgage usually believe that the property value will increase in the near future and they can sell it for a profit. This is known as condo flipping or property flipping. For a more complete biography of Mr. Unpredictable, click here.


Mr. Flexible: Interest Only Loans

The Interest Only Loan allows you to make monthly payments only on the interest and not on the principal for a specified amount of time, usually 5 to 10 years. However you still have the right to pay more if you want to so that your balance can decrease. After the interest-only period, your principal balance will be amortized for the remaining term. The result is that early payments are significantly lower than later payments. This option is popular with people whose incomes are expected to increase in the future. However the Interest Only Loan also carries high risks associated with uncertain future interest rates and ability to refinance or make substantially higher payments. The FDIC offers is a great source of information about these types of loans. For a more complete biography of Mr. Flexible and his counterparts, click here.

These two mortgages are by no means equal. With a fixed rate, you pay a consistent payment amount every month. With an adjustable rate, your mortgage rate adjusts as the interest rate fluctuates. Thus, your payments increase or decrease as the interest rate changes how much you owe on the mortgage. This is usually riskier than the fixed rate option because there is a higher level of uncertainty.

For the Fixed Rate: According to Freddie Mac, the stable and certain monthly payment offered by fixed rate make your financing more manageable and easier to adjust. So it is a desirable option especially for first-time homebuyers. However, remember that taxes and insurance can change over time and may increase your payment if they make up part of your mortgage.

For the Adjustable Rate: These mortgages usually start off with lower interest rates and lower monthly payments. The interest rates can go up over time. So this type of mortgage may be suitable if you expect your income to steadily increase over time. Adjustable rate mortgages can also help you qualify for a larger mortgage.