When deciding on the right mortgage for you, it helps to understand the difference between the two major mortgage types: fixed rate and adjustable rate.
With a fixed rate mortgage, your interest rate never increases. Even if rates go up, your rate will remain the same. This makes budgeting easier.
Lenders generally offer fixed rate mortgages for 10, 15 and 30 years. The longer the term of your loan, the lower your monthly payment will be. With a shorter term, though your payment may be higher, you're likely to build equity faster.
Fixed rate mortgages are the most popular choice for homeowners, especially those who plan to stay in their home for many years.
With an ARM, you typically experience a lower, fixed interest rate for a set period of time. Then, the rate adjusts based on financial markets for the remainder of the loan term. As a result, your monthly payment can be lower at first, but then may increase if interest rates go up.
The most common type of ARM is called a Hybrid ARM, often advertised as 3/1 or 5/1 ARMs. This offers a fixed rate for an initial period of time, before adjusting to the current market rate. The first number tells you how long the fixed interest-rate period will be, and the second number tells you how often the rate will adjust after the initial period. For example, a 5/1 ARM is fixed for the first 5 years, before adjusting every year thereafter.
An adjustable rate mortgage is a good choice if you're confident that interest rates are likely to remain stable or go down in the future.