Choosing a type of mortgage loan is one of the most important decisions you’ll make during the home buying process. After all, you’re mortgage loan will stay with you until you pay it off, sell the home, or refinance the loan.



So it’s important to consider each type of mortgage loan in advance, with an eye toward the pros and cons of each type.





Only the Home Buyer Can Decide

I’m often asked what type of mortgage loan is best, but it’s not the kind of question I can answer on behalf of another person. The only person who can and should make that kind of decision is the home buyer. The best that I can do is point out the various pros and cons of the major types of mortgages, and let people make their own decisions based on that.



The best way to start this decision-making process is to narrow the field. Start with the major differences between mortgage loans (such as fixed rate vs. adjustable rate), and learn the pros and cons of each. This way, you can reduce the number of options and make your final decision easier to reach.



So let’s look at the difference between fixed-rate and adjustable-rate mortgage loans so you can decide which is right for you.



The Major Types of Home Loans

The biggest difference between home loans has to do with their interest rates. Home loans are either fixed-rate or adjustable-rate. Of course, within each of these categories there are many sub-categories, but it all starts with the fixed vs. variable classification.



With a fixed-rate mortgage loan, your interest rate will never change, regardless of what the economy does. On the contrary, adjustable-rate mortgages (referred to as ARMs) have interest rates that adjust periodically during the life of the loan.



Fixed-Rate Mortgage Loan: Pros & Cons

As the name suggests, a fixed-rate mortgage is a mortgage where the interest rate stays the same over the life of the loan. As a result, your monthly mortgage payment does not change.



Certainty is the primary benefit of a fixed-rate mortgage loan. You always know what your interest rate will be, regardless of what the economy does. The downside is that you’ll pay a premium for this predictability, in the form of a higher interest rate.



When a mortgage lender grants a fixed-rate loan for a long period of time (like 30 or 40 years), they take on a certain amount of risk. If the prime interest rate goes up during the life of your loan, you will not have to pay the difference -- the lender will. This is why they charge a higher interest rate than with an adjustable-rate mortgage (next topic).



Adjustable-Rate Mortgage (ARM) Loan: Pros & Cons

These days, most adjustable-rate mortgages start off with a fixed rate for an initial period of time, usually 3, 5 or 7 years. During this introductory period, the interest rate is fixed and will not change. After the introduction period, however, the loan converts to an adjustable-rate.



During the initial fixed period, the interest rate of an ARM loan is usually lower than the interest rate on a traditional fixed-rate mortgage. The downside is that you can never predict how the interest rate will adjust after the introductory period. So in this regard, you can think of the initial period as a reward for the uncertainty of the adjustable period. You will start off with a lower interest rate than a regular fixed-rate loan, but you have the uncertainty of the adjustment phase.



So an ARM loan may be a good choice if you only plan to live in a home for a few years. That way, you could benefit from the lower interest rate during the initial period, but sell the home before the uncertainty of the adjustment period.



Narrowing the Field

Once you’ve decided between a traditional fixed-rate mortgage and an adjustable-rate mortgage, you’ve made things a lot easier. By making this decision first, you’re narrowing the field of options quite a bit. Then it’s just a matter of examining the different types of loans under the classification you’ve chosen.



Happy home buying!



* You may republish this article online if you retain the author’s byline and the active hyperlinks below. , Brandon Cornett.