ARM vs. Fixed Mortgage Rates Explained
Most people are familiar with a fixed mortgage, but what is an ARM rate? Simply, the variable-rate mortgage or ARM is a type of mortgage that will start with a fixed interest rate. This is usually normal than the traditional fixed rate. Over the years, however, that interest rate will change depending on the market indexes. High indexes mean high interest, and low indexes mean that your payments may go down, but it’s not guaranteed. Also be sure to read your mortgage’s fine print.
With a fixed-rate mortgage, you have one flat interest for the lifetime of your loan, whether that’s 15, 20 or even 30 years.
So why would you go with one loan over the other? Check out our guide to ARM vs. fixed mortgage rates.
Explaining Fixed-rate Mortgages
As a homebuyer with a stable job and a life in the community, the fixes-rate mortgage may be more attractive to you. You have one payment, and it doesn’t change from payment to payment. If you’re planning on retiring soon, this option is better because you can plan for payments in an easier way.
Most homebuyers prefer these payments because they’re more practical, and they give borrowers some stability in the long run. If rates are already low, then you don’t want to risk seeing those rate go up and having to pay them, hoping they’ll go back down again.
Pros
- Your payments will not change
- You’ll have an easier time making a budget
- The mortgage is simple and straightforward
- There are no risks involved
Cons
- If interest rates go down, you won’t be able to take advantage of them because you’re locked in a rate, unless you want to refinance
- Payments for these loans are usually a bit higher, so you won’t be able to borrow quite as much.
Understanding Adjustable-rate Mortgage
As a young person buying a home, you will see the markets fluctuate over the years. Maybe interest rates will dip. ARMs work best for people with long-term investments, and you may be able to get lower interest rates while still living in your home. If you hoped to get a more expensive home, then your lender may be apt to sign you on since you’ll be doing a smaller payment each month.
Some owners who have more short-term goals prefer ARM loans. Maybe they want to move around or they don’t want to be tied to one city for too long. If you want to invest in a bigger, better home later on, this method can help lay the groundwork for that future buy. Having gone through the lower payment loan, you’ll feel more confident with the next one.
Pros
- You’ll make lower payments and have lower rates for the first few years
- You will probably be able to get a bigger or more expensive home because your payments will be so much lower per month
- If rates get lower, you’ll be able to capitalize on them without having to go through the long process of refinancing
Cons
- Payments can skyrocket if interest rates go up after the introductory period
- You need to be on top of the complicated jargon that comes with these loans
- In certain cases, like negative amortization loans (NegAm), you might have to pay more than you originally thought when you closed the deal
So which one is better? Really, it all depends on your situation. Speak with your realtor to decide what’s best for you.