Fixed-Rate Advantages

• Your interest rate remains constant with a fixed rate mortgage. If interest rates go up, you can be secure in the knowledge that yours won't. You will be able to budget for the long term with a fixed-rate mortgage because your monthly payments will not change. Fixed rates are easy to understand and are a good choice for many first-time homebuyers, according to Bankrate.com.
  
  

Adjustable-Rate Advantages

• An adjustable rate mortgage, also called an ARM, usually offers lower rates early on in the loan term. The rates adjust after an initial period. This is a good feature if you are certain that your income will increase in a few years. You can get into a larger home with an ARM if the rate is lower at the beginning, confident that you will be able to afford the larger payments after the initial fixed ARM period ends. Also, with an ARM, when interest rates go down, so will your interest rate.
  
  

Fixed Rate Disadvantages

• If you have a fixed-rate loan and the interest rates fall, you have to refinance your house to take advantage of the lower interest rates. Refinancing can cost several thousand dollars in fees and closing costs. In a high-interest rate market, fixed-rate mortgages can be too expensive and unaffordable for some folks.
  
  

Adjustable-Rate Disadvantages

• An ARM can become unaffordable if the interest rates rise significantly. According to Bankrate.com, ARM rates are set artificially low in the beginning. The rates will adjust upward at some point, and it usually adjusts higher than the going rate for a fixed-rate loan. ARMs are more confusing to unsophisticated borrowers. Some borrowers have a negative amortization loan, for example. With that type of loan, borrowers can easily become upside-down on their home, meaning they owe more on the house than what it is worth. Negative amortization loans have low initial payments that only cover part of the interest. The part you don't pay gets rolled into the principal.
  
  

Best Choice

• If you know that you are not going to stay in the home for more than a few years, you might be better off choosing an ARM. You can save money in interest in the beginning and use the money you save for the home you intend to stay in for the long term. Ideally, you will move out before the rate increases occur.
  
  Another consideration when selecting a fixed-rate or an adjustable-rate mortgage is the interest rate. If interest rates are high, you will probably be better off with an ARM. Chances are good that rates will come down when interest rates are high, according to Bankrate.com. On the other hand, if rates are low, you might be better off choosing the fixed rate.