Fixed-Rate vs Adjustable-Rate Mortgages
What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan?
In short, the most important difference between fixed-rate and adjustable-rate loans is:
- A fixed-rate mortgage has one interest rate which will remain the same throughout the life of the loan.
- An adjustable-rate mortgage (ARM) has an interest rate which can change multiple times throughout the life of the loan
Typically, fixed-rate mortgages are the more popular option, but it’s important for you, as the homebuyer, to fully understand both options so you can make the right decision for your unique financial situation.
With one interest rate for the entire life of the loan, fixed-rate mortgages give homeowners the ability to plan their finances on a set payment. Many borrowers appreciate the stability that a fixed-rate mortgage provides. If you plan on staying in your home for more than a few years, this would be a great option.
Benefits of a Fixed-Rate:
- Predictable monthly payments can make it easier to manage and maintain a household budget
- Mortgage rates may increase in coming years, but with a “fixed” interest rate, bad economic times, inflation, and interest rate increases won’t affect the homeowners
- Fixed-rate loans are available in a very wide variety of loan types, including conventional, jumbo, and government-backed FHA, VA, USDA* and other loan programs
A disadvantage to a fixed-rate mortgage is that even if rates drop in the mortgage market, borrowers will maintain the same rate. However, borrowers do have the ability to refinance their loan and get a lower interest rate if they choose.
Adjustable-rate mortgages(ARMs) have a fixed rate for a certain number of years. After that, the loan begins to adjust to any changes in mortgage rates. Rates for ARM’s are generally lower than fixed-rates, so this makes them initially easier on budgets.
After the introductory period ends, rates will fluctuate with the market; meaning they can rise higher if mortgage rates rise, causing higher monthly payments. Rates can also decrease with an ARM, allowing payments to go down. The Federal Reserve recently cut rates for the first time in ten years, so right now could be the best time to refinance.
Benefits of an ARM:
- A low-interest rate means low initial payments
- Great tool for homebuyers looking to buy and sell within a few years (An ARM may save you money if you pay attention to the market and avoid getting stuck at a higher rate.)
- ARMs are also available in a wide variety of loan types including conventional and government-backed FHA, VA, USDA*, and other loan programs
It’s important for you to understand exactly how your loan will work. ARM’s can be very helpful in buying a home, but buyers will take a larger risk than if they went with a fixed-rate loan.
*Some state and county maximum loan amount restrictions may apply.
Adjustable, Fixed, mortgage rates, rate