When purchasing a home, there are many decisions to make before you get the keys – including what type of mortgage to use. Two types to consider are fixed-rate mortgages and adjustable-rate mortgages (ARMs). Let’s explore what sets them apart.
Fixed-rate mortgages
Fixed-rate mortgages give you the peace of mind that your payment will stay consistent throughout the term of the loan. The rate won’t change during the life of your loan regardless of what interest rate markets are doing. A fixed-rate option is a popular choice for most homebuyers because it takes the risk of your payment changing while you own the home out of the equation.
Refinancing your mortgage can be a great option if interest rates decrease. Refinancing is a process of paying off your current mortgage with a new mortgage that has a lower interest rate. Your loan officer can help you understand when this is right for you.
Adjustable-rate mortgages
ARM loans can be a great tool to use if the rate environment is right and you understand the risks. ARMs generally provide a lower upfront rate for a period of 3-10 years. After the initial period, the rate can adjust to the market rate at that time. If someone does not plan to live in the home for long or is comfortable taking a risk that the interest could rise, this can be a good option for them.
An ARM has a fixed interest rate during the initial adjustment period (up to 10 years), and then the interest rate will change every six months to match the market. At the end of the initial adjustment period, you can continue with the ARM if the interest rate is beneficial to your loan or convert to a fixed-rate mortgage. An ARM can have considerably cheaper interest rates than a fixed-rate mortgage, depending on when the adjustment period of your loan was locked in.
However, when rates are already low, an ARM may not make sense, because the savings amount doesn’t outweigh how complicated the structures can be to understand. A fixed-rate mortgage can also have lower rates than an ARM, depending on the market. Your mortgage lender can help you evaluate the current environment. Another disadvantage of an ARM is that because it is a higher-risk loan, it is not recommended for first-time homebuyers, as the payment can change and it may no longer be affordable if that payment increases.
No matter your circumstances, your mortgage lender can help you determine which type of mortgage is in your best interest and what terms will help you open the door to your dream home.