What Is the Best Type of Mortgage?

Find out whether a fixed or adjustable mortgage is right for you.

Laura Adams, MBA,
February 14, 2011
Episode #210

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Different Types of Adjustable-Rate Mortgages

In addition to hybrids, there are other types of adjustable-rate mortgages, like interest-only and payment-option ARMs:

  • Interest-only ARM: Allows you to pay just interest for a certain number of years, which makes your monthly payment much smaller during that period, but doesn’t reduce the size of your debt. For example, if you get a 30-year mortgage with a 5-year interest-only period, you can pay just interest for five years and then make higher payments that include both principal and interest for the remaining 25 years of the loan.

  • Payment-option ARM: Allows you to choose from several payment options each month, such as interest-only, principal and interest, or making a minimum payment that’s less than the interest due.

How Much Can an Adjustable-Rate Mortgage Increase?

You might be wondering how much an adjustable-rate loan can increase. I’ve had several adjustable-rate mortgages and it can be a little unnerving knowing that the payment could increase. But it’s also pretty exciting when the payment goes down! ARMs come with built in caps or limits on how much the interest rate can climb from one adjustment period to the next and how high it can go over the entire term of the loan. So you always know the worst-case scenario.

When Should You Get a Fixed-Rate Mortgage?

[[AdMiddle]Now that you understand the major differences between fixed and adjustable-rate mortgages, let’s discuss when they make sense. Here are three situations where you might want to go for a fixed-rate mortgage:

  1. Interest rates are rising. Locking in a low interest rate for the life of your home loan is a fantastic way to protect yourself against inflation.

  2. You want stability. Having the exact same mortgage payment for decades ensures that you’ll never have any financial surprises.

  3. You’re not going to move. Over the long-term a fixed-rate mortgage could potentially save you the most interest, especially if interest rates go up.