Hello and welcome to Money Girl’s Quick and Dirty Tips for a Richer Life.

Today’s Topic: Fixed Vs. Adjustable Mortgages

Ann from New Jersey called in with this question:

Hi Money Girl. This is Anne from New Jersey. I was wondering if you had any tips for how to negotiate a first mortgage on a first home purchase. I have basically no experience in this area and I just want to make sure that I’m as informed as possible. Thanks.

    
Hey there Anne. Thanks for the great question. It’s a big question that people have actually written entire books to answer, and I’ll be giving away one of these books in a few moments.

But first, here’s a “quick and dirty tip” about one aspect of picking the right mortgage.

First, you’ll want to decide what type of loan suits your needs best. Loans fall into two basic categories: fixed and adjustable.

To get clear about the type of loan that’s right for you, ask yourself the following question: how long do I plan to keep my loan? This key question is the one that will influence your choice of loan type.

Do you plan to keep the loan and the house for a very long time? Do you think you’ll want to refinance after a few years to pull cash out of the property or for some other reason? Do you think you might sell the house in a few years to get a larger one or to downscale to a smaller one?

If you plan to keep the loan for a very long time, say several years or longer, a fixed-rate loan would be a reasonable choice since fixed rates are still at relatively low levels historically. It also makes sense to get a fixed-rate loan if it’s really important to you that your payment stays the same each month for the life of the loan.

If you don’t plan to keep the loan for a very long time, you could come out ahead with an adjustable-rate mortgage or ARM. Adjustable-rate mortgages come with 1-, 3-, 5-, 7-, or 10-year fixed rate periods. There are also monthly adjustable loans called option ARMs that have flexible payment options (and the potential for deferred interest, also known as negative amortization—more on this topic in a future episode).

You’ll want to make your best guess about the length of time you’re most likely to keep your loan. If you plan to refinance in, say, four years, then compare the rate of an adjustable loan with a five-year fixed-rate period to the rate of a 30-year fixed loan. If the rate of the 30-year fixed is equal to or less than the rate of the five-year ARM, all else being equal, it would make sense to choose the 30-year fixed.

On the other hand, if the rate of the five-year adjustable were lower and you were confident you’d keep the loan for less than five years, then it would make sense to go with the five-year adjustable.

The interest rates on fixed rate loans are usually higher than the rates on adjustable loans because fixed rate loans expose the lender to more risk if interest rates were to rise. However, we’ve been in a period where the rates of fixed loans have been very close to, and sometimes even better than, adjustable loans.

You can get a sense of what mortgage rates to expect on websites such as Bankrate.com, and from online lenders such as E-Loan and Quicken Loans.

A competent mortgage broker can help you identify the best loan for your needs and do the comparison shopping for you. They can also give you an idea of the loan amount you qualify for.

The expertise of mortgage brokers varies greatly. To find a knowledgeable and experienced one, ask friends, family members, and colleagues if they know of someone they had a good experience with and would recommend to you.

For your first home purchase, it makes very good sense to enlist the help of an experienced mortgage broker. Buying your first home can be stressful enough without adding the additional burden of comparison shopping for a loan.

I don’t have time to cover them here, but there are several other important considerations when choosing a mortgage that I’ll talk about in upcoming episodes.

Today, I’m giving away a copy of 106 Mortgage Secrets All Homebuyers Must Learn But Lenders Don’t Tell by Gary Eldred. This week’s winner is Kelly A. from Sioux Falls, South Dakota. Kelly was the first person to correctly answer last week’s trivia question, which was:

Which three states in the U.S. are growing the fastest?

Kelly correctly answered that the fastest growing state is Arizona, followed by Nevada, and then Idaho. Congratulations, Kelly! Please check your e-mail for instructions.

And here’s a little more information for the curious: The next two fastest growing states are Georgia and Texas. You can find a link to a US Census press release showing the top 10 fastest growing states at the end of the transcript for this episode at quickanddirtytips.com.

Because this episode has a sponsor, I’m giving away a second bonus copy of the book. If you’ve sent me an e-mail or posted to the blog, you were automatically entered in the giveaway for the bonus book. And the winner is Melissa in Cary, North Carolina. Congratulations! You’ve won the bonus copy of 106 Mortgage Secrets. Check your e-mail for instructions.

Cha-ching! That's all for now, courtesy of Money Girl, your guide to a richer life.

If you have a question or comment, e-mail it to money@quickanddirtytips.com. Money Girl is part of the Quick and Dirty Tips network. Check out the other helpful Quick and Dirty Tips podcasts like Mr. Manners, Legal Lad, and The Mighty Mommy. Thanks for listening!


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Click here to see the top 10 fastest growing states