Interest Options

Once you have decided how you are going to repay the mortgage, you need to choose a type of interest bill that will best suit you. The type of interest bill you choose can affect how long you are tied to the same lender and the kind of penalty fee you may have to pay if you move house or switch lenders in the future.

Fixed Rate Mortgages (FRM)

A fixed rate mortgage is one that allows you to pay a set rate of interest for the entire life of the loan. This means that your monthly payments for interest and principal stay the same until the loan is fully paid off. This type of mortgage is available for 30 years, 20 years, 15 years and even 10 years. The longer the term, the higher the total amount of interest you will pay. You may also be able to arrange a 'bi-weekly' mortgage, which shortens the loan by calling for half the monthly payment every two weeks. As there are 52 weeks in a year, 26 payments, (or 13 'months' worth) are made every year.

One major advantage of a fixed rate mortgage is the certainty of knowing your monthly payments will not increase over the life of the loan, even if interest rates rise. This could also save you quite a bit of money in comparison to someone with an adjustable rate mortgage whose interest rate will reflect the market. The downside, of course, is that if interest rates fall below your fixed rate, you won't be able to take advantage of them. You'll be paying more than someone with a adjustable rate mortgage. The only way you will be able to take advantage of a drop in interest rates is to refinance the loan, which may be a costly transaction.

Fixed rate mortgages may appeal to you if you are a financially cautious person.

Adjustable Rate Mortgages (ARM)

Also known as a variable rate mortgage or floating rate mortgage, an ARM carries an interest rate that a lender can vary during the loan term. The interest rate will vary depending on changing market conditions; if interest rates go down, your mortgage payment will drop also. Conversely, if rates go up, your monthly mortgage payment will go up, too. In order to offset the increased risk of an increase in interest rates, ARMs typically offer borrowers a lower rate-compared to a fixed rate mortgage-during the first year, generally starting with an interest rate that is 2-3% below a comparable fixed rate mortgage.

For more details on Fixed Rate and Adjustable Rate Mortgages, check out the Intersites Guide to Mortgages.