Gather round, friends. Today we’re discussing fixed vs. adjustable-rate mortgages (ARMs). First of all, what’s the difference between the two?
Fixed rates are exactly what they sound like: rates that remain unchanged throughout the life of a loan. If you lock in at 2.6% for 30 years, you’ll pay 2.6% interest for 30 years.
Adjustable rates are fixed for a period of time—usually three, five, seven, or 10 years—and then are adjusted each subsequent year over the life of the loan. The adjustment is made according to a designated index that fluctuates based on market trends. (If you like to know what’s in the sausage, you can learn more about indexes and how adjustable rates are calculated here.)
Now, why would you opt for a fluctuating, topsy-turvy interest rate when you could simplify your life and your finances with a fixed rate? Here’s a side-by-side comparison to shed some light.
Fixed-Rate Mortgage lowdown:
- Breezy budgeting with unchanging monthly payments.
- Operates independent of outside economic forces.
- Simple to understand. No gobbledygook.
- Often carries higher initial rates than ARMs.
- Provides little room for customization.
- Inherently disadvantageous when rates fall. You’d have to refinance to seize the benefit – that includes paying loan fees and costs all over again.
Adjustable-Rate Mortgage (ARM) lowdown:
- Typically offer lower rates and monthly payments than comparable fixed-rate mortgages during the initial rate period, enabling borrowers to pay down the principal faster.
- Allows borrowers to passively take advantage of falling rates without having to refinance.
- Rates (and payments) may rise considerably over the life of the loan—a shock to those with strict monthly budgets.
Do you know how long you plan to stay in the home? If for only a few years (i.e., 10 years or less), it can be advantageous to take the ARM with the lower rate. In this case, taking the ARM has no pitfalls!
How frequently does the ARM rate adjust after the initial fixed-rate period is up? While most ARMs adjust each year on the anniversary of the loan inception, some can adjust as often as once per month. Determine just how much or little volatility you’d be most comfortable with, and negotiate the mortgage terms from there.
What’s the interest rate environment like right now? If rates are high, ARMs generally make more sense, with built-in room for rates and payments to fall down the line.
How strict is your monthly budget? Do you have a lot or a little wiggle room each month once all the bills are paid? No one knows your finances better than you do, so choose wisely (and reasonably!) when selecting which type of mortgage rate is right for you.
If you’re still undecided as to which loan type makes the most sense for you, don’t hesitate to get in touch. Simplist’s loan officers have a wealth of experience helping borrowers with diverse profiles to figure out the appropriate mortgages for their needs. Schedule a call today – we’re here to help!