Pros & Cons of ARMs vs Fixed-Rated Mortgages

The Fed recently cut rates for the third meeting in a row in an effort to sustain the economic expansion. These unusually low rates could mean that now is a great time for you to buy a home or refinance your current mortgage. Dropping temperatures and busyness of the holiday season may be tempting reasons to wait until spring to sell or buy, but these rates may not stay this low forever. Plus, there are plenty of benefits to selling in the cooler months. So, are you convinced yet? If you're considering buying a home soon, it's important to know the differences in fixed-rate versus adjustable-rate and the pros and cons of either option.

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

In the current market, studies show that millennials prefer ARMs because it's a more beneficial loan product for their needs. The opportunity for lower upfront costs and the flexibility at anytime make ARMs a desirable option. However, fixed-rate mortgages are the more traditionally popular option. Regardless of which option you choose, it's important for you as the homebuyer, to fully understand both loan types so you can make the right decision for your unique financial situation.

Fixed-Rate Mortgages

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

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.

The road to homeownership can be confusing without a guide to help you. Contact us today for more information.