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Adjustable Rate vs Fixed Rate Mortgage: Which is Best for You?
October 30, 2019
When shopping for a home loan, there isn’t a one-size-fits-all solution. Each loan option has its pros and cons. It’s important to look at your current situation and future goals to determine the best loan for you.
The difference between a fixed rate and adjustable rate mortgage (ARM) is the interest rate. On a fixed rate mortgage, the rate is set for the term of the loan and will not change, whereas the interest rate on an adjustable rate mortgage may go up or down over the term of the loan.
Adjustable Rate Mortgage
An adjustable-rate mortgage has an interest rate that can change, meaning your monthly payments can increase or decrease over time. Market conditions, which are determined by a third party, dictate changes in the index (a benchmark interest rate). Since the interest rate can change on an ARM, there are some important questions to ask before taking one out. How soon can your payment increase? How frequently can your interest rate adjust?
Since some ARMs have a lower rate and payment in the beginning of the loan, this may be a good option for a buyer who doesn’t plan on living in one place for very long. With an ARM, you can also take advantage of falling rates without needing to refinance your home. On the other hand, if the index rises, your rates and payments will also rise. This can be hard on your budget and unpredictable.
Fixed Rate Mortgage
With a fixed rate mortgage, you’ll have the same interest rate for the lifetime of the loan. This type of loan tends to be more popular due to its stability. You know that your house payments won’t change. A fixed-rate mortgage is easy to understand, which makes it a good option for first-time home buyers.
What are the drawbacks of a fixed-rate mortgage? While this type of financing is more predictable for your budget, the interest rate typically starts higher than an ARM. A Fixed Rate loan could potentially cost you more in interest over the lifetime of the loan. Depending on the economy, interest rates could fall and with a fixed-rate mortgage you’ll need to refinance to take advantage of that (which includes paying borrowing fees and costs again).
What’s the Best Option for You?
It’s important to do the math before deciding on the right loan for you. The biggest perk of an ARM is that it is initially cheaper than a fixed-rate mortgage. If you plan on being in your home for a couple years during the introductory period, you can enjoy lower interest rates before selling and moving on to another home.
Ask yourself how large of a mortgage payment can you afford? Would you still be able to afford your ARM payment if the interest rises? What are the interest rate trends in the market today?
Check out Centier’s mortgage calculators to help you get a head start on your home loan journey. And don’t forget that we offer a variety of mortgage loan products with competitive rates, great service, and low closing costs. Contact us today to get started with your home loan!