Mortgages are often confusing for a first-time homebuyer, as there are many factors to consider. Among this is whether you’re supposed to get a home mortgage with a fixed rate — often called a "vanilla wafer" mortgage — or one with an adjustable or "floating" rate.
To help you get a better understanding of these two types of home mortgage, and perhaps lead you to a better decision that fits your budget and lifestyle, here is a short comparison:
A fixed rate home mortgage offers an interest rate that never changes — no matter what the homebuying market looks like — throughout the term of the loan. It’s a great option if the rates are low during the time you’re buying a house. It’s also the more advisable and sensible option if you have the money to shoulder a pricier loan (the price you pay for an interest rate that doesn’t move even when the market rises).
A first-time buyer would probably have an easier time discussing this type of loan because it’s fairly straightforward. If you’re the type who never waivers in budgeting monthly expenses, this is also the type of loan you may wish to consider.
An adjustable-rate mortgage (ARM) is the opposite of a fixed rate mortgage, in that the interest rate may vary depending on the prevailing market rates. Those who choose this type of loan find the lower initial cost attractive. Due to lower initial payments, an ARM can allow buyers to get a bigger and a more expensive house they wouldn’t be able to afford if they were to get a fixed rate.
That’s not the end of the story, though. An ARM’s interest rates may vary over time, so your payments may go from 2% to 12% interest over the course of the loan. On the other hand, if market rates fall, you don’t have to refinance to enjoy the lower payments.
Both of these types of mortgage carry with them some pros and cons. What is important is you determine which one fits your paying capacity for the duration of the loan, and only work with a reputable lender.