Choosing the best loan
Fixed-rate vs. nonfixed-rate mortgages
Mortgage loans generally fall into one of two broad categories — fixed-rate and nonfixed-rate.
- Fixed-rate mortgages feature a nonchanging interest rate. With a fixed loan, the principal and interest portion of your monthly mortgage payment do not change; although, real estate taxes and homeowners insurance costs may rise from year to year, resulting in a higher monthly payment.
- Advantages and disadvantages: Fixed-rate mortgages are ideal for you if your income is not rising rapidly and you want the comfort of knowing the principal and interest portion of your mortgage payment will not change. The downside of fixed-rate mortgages is that they typically have a higher initial interest rate than nonfixed-rate mortgages.
- Nonfixed-rate mortgages mean you assume some of the interest-rate risk that the lender normally assumes on a fixed-rate mortgage. For taking this risk, you would receive a lower initial interest rate than the fixed-rate mortgage's interest rate.
- Advantages and disadvantages: A lower interest rate means a lower monthly payment. The trade-off with the nonfixed-rate mortgage is that, beyond increasing costs for taxes and homeowners insurance, the interest portion of your monthly payment also increases. The point at which the payment can be changed varies by the program you choose. It can range from one month to more than five years. Typically, the shorter the period before a change can occur, the lower the initial interest rate. Nonfixed-rate mortgages are designed for borrowers who are comfortable with their ability to handle payment increases.
- For more information about nonfixed-rate mortgages, see the ARMs Glossary.
