Get a fixed or adjustable mortgage?


Ask Greg – Should I get a Fixed or Adjustable Rate Mortgage?

Q: I'm buying a home. Should I get a fixed rate or adjustable rate mortgage?

A: Well Sara, the optimal choice will depend on variables such as how long you plan to be in the home, and whether you expect steady or sharply higher income in the years to come.

To start, there is nothing wrong with opting for a fixed rate mortgage. With a fixed rate mortgage, what you get is permanent payment affordability. The fixed interest rate means the principal and interest components of your mortgage -- the largest part of your monthly household budget –-- will never change. And that's a nice assurance to have, making it easier to plan around and enabling you to increase your standard of living as your income grows in future years while the mortgage payment holds steady.

An adjustable rate mortgage is more of a calculated risk, but one that can pay off nonetheless. If you expect to be in the home less than 10 years, for example, you can opt for a hybrid adjustable rate loan that offers a fixed rate for 10 years, before becoming adjustable annually thereafter. If your timetable pans out, then the loan functions as a fixed rate loan, but at a lower rate than a traditional fixed rate mortgage.

If you expect sharply higher income in future years, then the risk of a spike in the monthly payments on an adjustable rate loan is mitigated. But for the majority of homebuyers, you're better off avoiding any risk of future payment increases and just going with a fixed rate mortgage.

I hope that helps and thanks for the question, Sara.

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