Fixed Rate vs Adjustable-Rate Mortgage

Fixed-Rate Mortgages

This type of mortgage charges a set rate of interest that remains unchanged throughout the life of the loan. The main advantage of a fixed-rate loan is that the borrower is safe from a sudden increase in monthly mortgage payments due to interest rates going up. Fixed-rate loans are easy for borrowers to understand and vary little from lender to lender.

The main disadvantage of fixed-rate mortgages is that if interest rates are high, qualifying for a loan is more difficult because payments are less affordable.

Although your interest rate is fixed, the total amount of interest that you will pay depends on the mortgage term you choose. Most lenders offer fixed-rate mortgages for a term of 30, 20, and 15 years. 30-year mortgages are the most popular because they offer the lowest monthly payment.

Adjustable-Rate Mortgages (ARM)

The interest rate for this type of mortgage will vary over the life of the loan. The initial rate for an adjustable-rate mortgage is set below the market rate on a comparable fixed-rate loan, and then the rate rises as time goes on. ARM’s have a set time period where the initial rate remains constant, but after this, the interest rate will adjust at a predetermined frequency. After the initial rate term, the loan will reset based on current market rates.

The biggest advantage of an ARM is that it can be significantly less expensive than a fixed-rate mortgage, at least for the first three to seven years. ARMs are also attractive to homebuyers because their low initial payments usually enable the borrower to qualify for a larger loan.

The downside to an ARM is that your monthly payment can change frequently over the life of the loan. If you decide to take out a large loan, your payment could drastically increase if interest rates rise.

Which Loan Is Best For You?

Before choosing a mortgage type, you need to consider a wide range of factors including your personal finances, economic realities, and the current market interest rates. Consider the following questions before deciding on a loan:

• How large of a mortgage payment can you afford today?
• Could you still afford an ARM if interest rates rise?
• How long do you plan on living in the home you purchase?

In Conclusion

It is important to choose the loan type that is best for your current financial situation. Discuss your options with your loan originator and weigh the pros and cons of both mortgage options.