Do you really know what the difference is between an adjustable vs fixed rate mortgage?

Choosing between these two types of loans can be a tough decision. Besides all of the factors in a mortgage, you also have to deal with biased information. Some agents will try to sell you one loan over the other because of the higher commission.

Here are a few quick pointers that can help you pick the mortgage thats best for you:

• Decide on how long you want to pay for your mortgage
• Decide on how much risk youre willing to tolerate
• Decide on how much youre willing to spend

Decide On How Long You Want To Pay For Your Mortgage

There are two main options. You can pay off your loan in 30 years or 15 years. Keep in mind that these periods are set by the banks. You can also pick your own schedule. Its all a matter of how much money you have in your pocket.

Now with a 30 year fixed loan, your payment amount is primarily based on the interest rate and the loan amount. You pay a set amount until the loan is paid off.

With an adjustable rate mortgage (ARM), you will initially pay a lower amount. These types of loans are attractive because of this. However, the payments dont stay low forever.

After an initial fixed period of low payments (ie. 3-7 years), the loan rate will be reviewed. Your resultant payment will be adjusted according to the market conditions.

Decide On How Much Risk You Are Willing To Tolerate

The main reason why adjustable rate mortgage payments are lower is because of the amount of risk. With a fixed rate mortgage, the bank is taking on more risk. This higher risk is reflected in the higher payments. Looking at the reverse, the consumer takes more risk with an adjustable loan hence, the lower payment.

So how much risk are you actually taking. Theres a combination of bank and personal factors. Adjustable rate mortgages arent what they used to be. In the past, there was barely anything to protect the consumer. Then when interest rates spiked up, many people defaulted on their loans. This was as bad as it was for the consumer as it was for the banks.

So to protect themselves (and also the consumers), the banks started using caps on adjustable rate home mortgages. So even if there was a huge spike, the payment could only go up to a pre-determined limit. This reduced the chances of a person defaulting on their loan.

Decide On What You're Willing To Spend

To continue on the personal factors, you have to think about the short and medium effects of the loan on your finances. So lets go over a few scenarios:

You pick a fixed rate mortgage. Youre making it by, but the hefty mortgage does put a hamper on your weekend excursions. All of a sudden, you get laid off.

Heres the second scenario. You get an adjustable rate mortgage, which does initially allow for some weekend fun in the sun. Five years later, the rate adjusts. Then you realize that youre income hasnt adjusted as much as your mortgage has.

So whats the point in being so brash in these scenarios. Sometimes life takes a course that you dont anticipate. You have to plan for all sorts of cases, not just the happy and positive ones.

After looking at these scenarios, youll be able to see if a low cost ARM is okay, or a fixed rate loan is better?

You have to look at your income and your investments. Your future cash flow might be the pivotal part of choosing your future loan. So forget about what youre friends and family are telling you. Go with what YOU know and youll be able to find the loan that suits you.