The fixed rate mortgage offers stability, but a higher payment. The adjustable rate has a lower initial payment and enables you to get a larger loan, but it's more risky because you cannot predict how interest rates will fluctuate. If you are considering an ARM, ask the following:
1. Will my income cover higher mortgage payments if interest rates go up?
2. On what market variable is the loan rate dependent?
3. How volatile is the variable?
4. How long do I plan to own this home?
If you intend to keep it only a few years, the ARM is a good bet because the interest rate cannot increase much in a short period. If you plan to stay 10 to 20 years, the fixed rate may be the better option.
Financial Ramifications of the Loan
Ask the lender or mortgage broker to project your financial commitments over the full life of the loan. You need to know your monthly payment, the rate of interest and the total amount of the loan for each type. If you are considering an ARM, ask the lender to project the worst case, with the highest interest rate permitted by the cap and any increase in the principal due to negative amortization.
Sometimes, lenders use financial terms confusing to the layman. Just keep asking questions until you understand. Ask the lender to explain it in plain English. You have every right to do this. Federal law requires lenders to give you this information.