Fixed Rate or Adjustable Rate? What's the difference and how do they work?

Let's get the obvious one out of the way: 

Fixed rate locks in your interest rate at the current rate when you apply for your mortgage.

Adjustable rate allows the interest rate to fluctuate. 

Fixed rate is always the safest in my opinion (and many experts agree) because your budget is stable. But for the sake of argument... let's look at ARM (Adjustable Rate Mortgages) really work. 

When you apply for an ARM, you'll get a set of numbers that look like this 3/2/5. 

What do these numbers mean? 

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​The first number (3) is your introductory interest rate. This will be in effect for the first year. The second number (2) is the maximum amount of increase that could occur in the 2nd year of the mortgage. So your mortgage could raise to as much as 5% in the second year. The final number (5) reflects the maximum increase allowed within the entire life of the mortgage itself. In this case, your interest rate could rise as high as 8%. 
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Does your interest rate ever decrease with an ARM? 
Yes. When interest rates fall, your monthly note will also decline in relationship to that interest rate decrease. 

Why would anyone choose an ARM over a Fixed one? 

Some who don't plan to keep the property more than a few years enjoy the lower introductory interest rate and payments as it reduces the expenses before they plan to resell the property. In other words, if you plan to buy a rehab project and resell, then an ARM might be a good choice.

Some people anticipate an increase in income and so they believe any increase will be manageable but I personally don't advise that because anything could happen to prevent that income increase. 

That's about it.

So keep these options in mind as you prepare to buy your next property.

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Getting into investing and wonder if you should buy as an LLC or not? Click HERE 

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