Fixed- vs. adjustable-rate mortgages
Fixed-rate mortgage interest rates remain the same for the life of the loan. An adjustable-rate mortgage (ARM) may start with a fixed rate and then the interest rate may fluctuate depending on market conditions. Here are the pros and cons of both to help you decide which option is right for your needs.
What is a fixed-rate mortgage?
If you plan to be in your home for a longer period of time, a fixed rate may be a better option. Fixed-rate mortgages typically have 15- or 30-year terms, both of which offer consistent, predictable principal and interest payments that stay the same over the life of the loan. The 30-year fixed-rate mortgage is the most common home loan in America.
Predictability: You know exactly how much interest you’ll pay and what your monthly principal and interest payment will be for the life of the loan. No surprises.
Stability: With more stability in your budget, you can better plan for savings and other purchases.
Simplicity: Fixed-rate loans are generally less complicated and easier to understand than adjustable-rate mortgages.
Locked in: If interest rates fall, you’ll have to refinance to take advantage of them, which will result in more closing costs and paperwork.
What is an adjustable-rate mortgage?
Adjustable-rate mortgages may have rates that can adjust each month, or may have an initial fixed-rate period of 5, 7 or 10 years. If you have a fixed-period ARM, and you plan to move before that period ends, this may be a good choice. However, if there’s a chance you might stay longer, make sure you will still be able to afford your payments if they increase when the rate changes.
Lower starting rate: Get a lower starting interest rate and payment.
Short-term benefit: It is typically a less expensive way to finance the purchase of a home if you plan to sell before the interest rate adjusts.
Variability: If interest rates fall in the future, your rate and payment may fall.
Unpredictable: If interest rates rise in the future, your rate and payment will rise, and the increase could be significant. This could cost you more over the life of the loan.
Complex: ARMs are more complicated loans. It’s important to fully understand things like margins, caps and adjustment indexes.