When you are purchasing a new home, unless you have the money to pay for the entire purchase in cash, you will have to take out a mortgage. A mortgage may sound like a scary concept, but simply put it is a fancy term for a house loan. While it is easy to explain what a mortgage is, the more confusing idea associated with a mortgage is the interest rate that will go along with your mortgage. There are primarily two types of interest rates that you will hear about when applying for a mortgage loan. They are variable interest rate (or adjustable rate) and fixed interest rate.

A variable interest rate is an interest rate that adjusts as the index that it is tied to changes. This means that a variable interest rate can rise or fall and this will affect your payment. Most mortgages with variable interest rates are set up so that your payment only changes amounts once a year and then is set at that rate until the next year. While the upside to a variable interest rate mortgage is that your payments can drop should interest rates drop, the downside is that your payment can also raise should your interest rate increase. Many times the interest rate for an adjustable rate mortgage will be less than that of a fixed rate mortgage at the same point in time. This is because the lender knows the interest rate on an adjustable rate mortgage will likely go up at some point, but the fixed rate mortgage interest rate must remain the same, so in order to afford this, lenders set the interest rate on a fixed rate mortgage higher.

A mortgage loan with a fixed rate means that the loan payment will stay the same for the duration of the loan. This is because a fixed interest rate never decreases or increases for the life of the loan. This can be a great thing if the interest rate that you are able to get is a very low rate, or during times when the market is volatile and interest rates likely to jump up.

Choosing which rate is right for you should be based on your financial needs and what type of mortgage loan approval you can get. Your credit will dictate the different types of interest rates and other loan terms that you may be eligible for. Inquire with your loan specialist about what their opinion is and what they think would be right for you, once you see what is being offered. Review the terms of the loan closely and you will be able to choose the right decision for your finances.