With the cost of homes being on the steeper side, it’s customary for homebuyers to opt for a home loan to buy their dream home. And when taking a home loan or mortgage, you should remain vigilant and consider all factors involved carefully. Keep your financial situation, long-term plans, liabilities and risk tolerance in mind when choosing the type of home loan or mortgage.

There are two types of mortgages – the Fixed-Rate Mortgage and the Floating Rate or Adjustable-Rate Mortgage (ARM). Choosing between the two would depend upon your financial circumstances and preferences. For those with a stable income that isn’t expected to change dramatically, a fixed mortgage might make a better option. But for those expecting a significant increase in their income or expecting the interest rates to dip, then ARM could be a better deal for you, saving payment of unnecessarily high interests in the long term.

Here’s a closer look at the two options to help you make a better decision:

Fixed-Rate Loans

• With fixed-rate loans, your rate of interest remains constant throughout the loan period. Having predictable monthly EMIs makes it easier to plan your finances in advance.
• When there is economic or market volatility, your mortgage payments remain unaffected too. Regardless of interest changes over the loan period, you won’t get any nasty surprises with your EMIs.
• Fixed-rate mortgages are ideal for long-term planners, even if they come with higher initial interest rates. Their advantage is they come with protection from future rate hikes.
• A disadvantage with fixed-rate mortgages is its inflexibility to changes in terms.

Adjustable-Rate Mortgages (ARM)

• An outstanding benefit of ARM is that the initial lower interest rates generally make it more affordable in the early years of the loan.
• ARM is more suited for those who are planning to sell the home in the near future or are expecting an increase in income.
• A major disadvantage of ARM is the potential for significant rise in interest rates, thus stressfully impacting your monthly EMIs. Even though there is a cap on the interest rate hikes during a period, the subsequent increase in EMIs could turn out to be a financial shock.

Choose the right loan strategy after deliberating on all these facts.