Comparing loans? Here are two terms you have probably been comparing - 'Fixed Rate Mortgages' and 'Adjustable Rate Mortgages'. Here's a quick and simple comparison between the two loan types:
First, the FRM. FRM or Fixed Rate Mortgages are probably the most typical loans that Americans go for. The term 'fixed rate' is used because this loan type enables borrowers to pay a fixed monthly payment. The convenience of this loan type roots from the fact that you have a specific amount to pay for on a monthly basis. This means that you can plan your budget with accuracy, allowing you to organize your income and expenses without thinking of other affecting factors.
FRMs are a great option if the rates are currently low, or at least if you foresee that the future interest rates will increase. With a fixed rate loan, your monthly payment will not change even when interest rates rise. Also, FRMs are easily understandable, especially for first time home owners.
However, there is also a down side to FRMs. Although Fixed Rate Mortgages are pretty convenient, they can come in more expensive prices compared to Adjustable Rate Mortgages or ARM. Also, with FRMs, you won't enjoy the dropping interest rates. Furthermore, FRMs are usually identical to each other, so you will miss the customization that ARM loans offer.
The next loan type is the ARM or Adjustable Rate Mortgages. In contradiction to the FRM, the ARMs adjust as the market changes rates. In short, ARM loan payments will go down if the rate goes down, and will increase if the rate rises. The reason why many borrowers also opt for ARM is because this loan type requires lower initial payments.
However, if you are going for an ARM, make sure that you have enough extra cash in case the rates increase steeply. Also, since ARMs are quite more complicated that FRMs, make sure that you put in time and effort understanding all the factors that affect the ARM rates.