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Fixed or Adjustable?

Updated: Apr 1, 2019

When obtaining a new home mortgage, one of the biggest decisions you'll have to make is whether to go with an adjustable-rate mortgage or a fixed-rate mortgage.  An adjustable-rate mortgage, or ARM, is a loan with an interest rate that becomes adjustable after the initial fixed period. In contrast, a fixed-rate mortgage is a loan with an interest rate that is fixed for the entire loan term.  Typically, ARMs have lower initial rates than a fixed rate mortgage, which can be very attractive to borrowers. However, it’s important to remember that the lower initial rate of adjustable-rate mortgages carry a degree of uncertainty.  On the other hand, a fixed-rate mortgage, offers rate and payment security but can be more expensive.  Here are some pros and cons of ARMs and fixed-rate mortgages. 


ARMs: Pros


Can help you save and invest more money.  For example, if your payment is $300 less with an ARM, you can save that money and use it to invest.


Have a lower interest rate and lower monthly payment.  Since we can use the lower payment when we qualify you, you may qualify for a larger loan.


Offer a reduced payment if you don't intend to keep the loan beyond the fixed period.


ARMs: Cons


If you’ve grown accustomed to the initial payment, the first rate and payment adjustment can be a shock. 


Comes with a degree of uncertainty — despite reduced initial rates, the rate and payments can rise over the life of the loan.


Fixed-rate mortgages: Pros


Constant rates and payments — there won't be any surprises even if inflation surges and interest rates increase.


Budgeting is easier with stability.  You can manage your money with more certainty because your mortgage payment won’t change. 


Fixed-rate mortgages: Cons


Fixed-rate mortgages tend to have higher interest rates than ARMs.  This makes fixed-rate mortgages too expensive for some borrowers, especially in high-rate environments, because there is no early-on payment and rate break.


Fixed-rate mortgage holders have to refinance to take advantage of falling rates.


All of these pros and cons should factor into your decision between an adjustable-rate mortgage and a fixed-rate mortgage.  In addition, here are some important questions to answer when deciding which loan is better for you: 


1. How frequently does the ARM adjust, and when is the adjustment made?


If you’re interested in an ARM, make sure you speak with us and understand the terms.  After the initial fixed period, most ARMs adjust every year on the anniversary of the mortgage.  Based on the specified index, the new rate is actually set about 45 days before the anniversary.  However, if that's too much volatility for you, you may be better off with a fixed rate mortgage. 


2. What's the interest rate environment like?


If rates are relatively high, an ARM might make sense because of their lower payment and rate.  The objective would be to refinance when rates come back down.  In contrast, securing a fixed-rate mortgage can make more sense when rates are relatively low.  


3. How long do you plan on staying in the home?


If you only plan on owning the house for a few years, it might make sense to take a lower-rate ARM.  You can build up savings for a bigger home down the line, since your payment and rate will be lower.  Since you'll be selling the home before the adjustable rate period begins, you'll also never be exposed to rate adjustments. 


As you can see, there are several things to consider when choosing between an adjustable-rate mortgage and a fixed-rate mortgage.  Reach out to us anytime with questions or if you’d like help in determining which loan is right for you.


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