Mortgage Calculators Determine Which Is Better: Fixed or Adjustable Rate Mortgage

As most borrowers are aware, a fixed rate mortgage has the same payment for the entire term of the loan.  An adjustable rate mortgage has a rate that can change, causing your monthly payment to increase or decrease overtime.  A mortgage calculator is good tool to determine the pros and cons of these two loan products.

The most important rule in using these mortgage comparison calculators is to make sure the data entered is current and accurate.  In order to compare the costs differences, rate differences and payment differences it is important that the interest rate on the loans being compared are the current market rates for both loan types. 

Once you have the current mortgage rates you can compare fixed-rate mortgages with adjustable rate mortgages to determine which type best fits your current financial lifestyle.  A significant part of this analysis is evaluating the future obligations of the loans.  The mortgage calculator will determine how much of a mortgage you can afford under both an adjustable rate mortgage and a fixed rate mortgage. 

The adjustable rate mortgage is likely to lead to a higher qualifying loan amount.  Most adjustable rate mortgages have a lower start rate than a comparable 30 year fixed rate loan.  In assessing the results of using the mortgage calculator, the borrower will have to balance the rate savings on the adjustable rate mortgage relative to a fixed rate mortgage during the initial low rate period of the adjustable rate mortgage, with the risk of rate increases when the initial low adjustable rate mortgage period ends.

In order to properly input the data in the mortgage calculator for the adjustable rate mortgage the user has to determine the value of the index the mortgage rate is based on, the margin that is added to the index, the periodic rate adjustment cap, and the lifetime rate adjustment cap.  The user must also specify an assumption about what happens to interest rates in the future.  The mortgage calculator will generate different options, based the various rate changes you may wish to consider over the life of the adjustable rate mortgage.  The worst case scenario of maximum rate increases will usually lead to the conclusion that the fixed rate mortgage is the superior alternative.  The likelihood of worst case rate increase is probably slim, but too many borrowers simply ignore the prospect of rate increases when the either chose the adjustable rate mortgage or when they consider the output of the payment produced by the mortgage calculator.

The mortgage calculator can be used to compare not only the fixed rate mortgage to the adjustable rate mortgage but to different variations of adjustable rate mortgages.  Some adjustable rate mortgages have lower start rates than others, the adjustment periods will be vary from annual adjustments to monthly adjustments and the rate caps will often vary.  Adjustable rate mortgages can be based on indexes like the one year Treasury rate or the three year Treasury rate.  Each of these adjustable rate mortgages will have different start rates and different rate changes.

When evaluating the output from theses comparison mortgage calculators it is ultimately up to the user to determine the possible rate changes and weigh these factors along with their current and projected income and expenses to determine what level of comfort they have between the two loan scenarios.

This entry was posted on Thursday, December 11th, 2008 at 2:14 pm and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.