To illustrate the different advantages of fixed-rate and adjustable-rate mortgages, we've created some imaginary homebuyers: Mr. & Mrs. Fixed Rate and Ms. Adjustable Rate. Which homebuyer's lifestyle choices, financial situation and life goals look most like yours? That may help you decide which loan type is right for you.
Meet Mr. & Mrs. Fixed Rate
Jack and Mercedes are a couple looking to buy a house. While they don't have children yet, they plan to in the future. They both have stable jobs, but they don't expect to make a lot more money in the future than they make now.
They find a nice home in a decent neighborhood. The neighborhood is safe and the schools are good, and Jack can fix the place up. They choose a 30-year fixed-rate mortgage because they know exactly how much they'll pay every month. Two years later, they have their first child. Three years later, they have another. Mercedes stops working for a while, but they reduce their budget and manage to stay afloat. When the kids get to be school age, Mercedes goes back to work.
At first, their house loses some value, but they're not planning to move soon. After 10 years, it's actually worth more than they bought it for. After 30 years, with their kids out of the house, they've made their last payment. Now, as they think about retirement, their monthly housing costs are only taxes and insurance, plus upkeep, so they can get by on less. They can sell the house if they want, or leave it to their kids.
Meet Ms. Adjustable Rate
Kathy is a physician who is also in the market for a house. She wants to buy a house because it can be a smart investment, and she enjoys redecorating. She has a successful career in medicine, and chances are that she'll have to move, possibly more than once, as her career advances. Chances are also good that she'll make significantly more money in 10 years than she does now.
After three years, a promotion comes—if she'll move out of state to a new hospital in Minneapolis. Kathy doesn't have to think twice and puts the house on the market. While the house lost a bit of value due to the economy, all the work she did on the kitchen balances that out, and she's able to get out without losing too much money. She moves to Minneapolis and rents for a while. A bump in salary comes with the new position. Eventually, she and her partner decide to settle down and buy a house together. And what kind of loan do they get? You guessed it: a 30-year fixed.