Choosing a mortgage loan that fits your budget and lifestyle means making some choices.  One of the most important decisions is whether to go with a fixed rate mortgage (FRM) or an adjustable rate mortgage (ARM). One is not necessarily better than the other; the goal should be to match the right kind of mortgage with your financial needs. The adjustable rate mortgage is simply not a guaranteed monthly payment over the life of the loan like the fixed rate mortgage.

With a fixed rate mortgage, you’ll have a rate that you agreed to lock in time (when you agree with your mortgage loan originator that a particular rate is what you want and the mortgage loan originator officially reserves that rate for you).  That rate will stay the same as long as you have the mortgage; you can choose a short term, such as 10 or 15 years, or a longer term, such as 25 or 30.  Shorter terms have lower rates, but higher payments.

No one can predict the future, but if your plan is to keep the property for several years or more, a fixed rate may offer peace of mind, knowing that your budget won’t change.  Each month, year after year, your payment will be constant during the loan repayment period.

The actual loan repayment piece of your total monthly payment is the principal and interest (P&I). The total amount you send to the lender each month may change if your taxes and homeowner’s insurance are included in the payment.  Real estate taxes and insurance typically go up over the years.  You’ll pay 1/12^th of the annual amount of each installment with your payment.  Once per year your escrow account (that’s is where your money for taxes and insurance is held for those bills to come due) is evaluated to be sure the right amount is being collected. If the taxes or insurance have increased, your payment will increase as well so that the escrow account always has enough to cover your insurance and taxes.