If you are buying a new home or planning a refinance, you may wonder which is better for you: an adjustable-rate mortgage (ARM) or a fixed-rate mortgage?
The short answer is: it depends.
Your family’s financial situation and the current average mortgage interest rate will affect which loan is best for you. A good place to start when you need to shop for a mortgage is to understand the two main loan types.
In this article, we will break down these two types of mortgages to help you make a more informed decision when the time is right.
What Are Adjustable-Rate Mortgages (ARM)?
When it comes to interest rates, adjustable-rate mortgages are more flexible than fixed-rate loans.
The interest rate on adjustable-rate mortgages is fixed for a fixed period of time (usually 7 or 10 years), then it changes to a variable rate for the remainder of the term. Following the initial fixed period, the interest rate will adjust to a new variable rate determined by market interest rates throughout the loan’s term.
If you have an ARM, you have a shorter time to pay the rate at the beginning before it resets to a higher or lower rate. Because you’re paying more principal and less interest, you have lower interest rates and payments than a fixed-rate mortgage. An ARM is a great choice for borrowers who want low payments at the beginning of the loan.
What Are Fixed-Rate Mortgages?
The interest rate and monthly payment on fixed-rate mortgages remain the same until the mortgage is paid off in full. The most popular fixed-rate mortgage terms are 15 and 30 years.
You have a predictable monthly payment and are protected from rising interest rates with a fixed-rate mortgage. The amount of your monthly payment will depend on the market rate at the time that you acquire your home loan. Due to the fluctuating market rates, your monthly payment may be higher or lower depending on the rate on the exact day you secure your loan.
If you get a fixed-rate mortgage, you’ll pay more interest than principal initially, but you’ll pay it over a longer period. A fixed-rate is a good option if you want your monthly payments to be consistent until your loan is paid off.
What Is the Best Option for Me?
What mortgage is best for you will depend on your circumstances. If you’re trying to choose between a fixed-rate mortgage and an adjustable-rate mortgage, consider these scenarios first.
When to opt for a fixed-rate mortgage:
- It’s your forever home
- A rate increase is not something you want to risk
In the future, interest rates are likely to rise
When to select an ARM:
- You intend to move in a few years
- You can afford the risk of paying a higher interest rate in the future
- Future interest rates seem likely to decrease
Mortgage shopping can be stressful—but it does not have to be! The right loan specialist can make all the difference when you buy, sell, refinance, or build your dream home. In the end, my goal is to help you and your family make the right decision, and find the home of your dreams in the beautiful state of Colorado.
If you’re ready to take the next step in your home buying journey, allow me and my team to help support you. Contact us today to schedule a consultation.