Differences Between Adjustable vs. Fixed-Rate Mortgage
There are two types of mortgage interest rates, and your monthly payment can change drastically depending on which you choose. A fixed-rate mortgage is just that – a rate that doesn’t change.
The most common terms for fixed-rate borrowers are 30 years and 15 years, but 10 and 20 year plans are also common. The shorter the term of your loan, the bigger your payments, of course, but the lower your interest rate as well. Because this fixed rate never changes, it is chosen for its predictability.
When you sign up for a 30 year mortgage at a 3% interest rate, your interest rate will remain at 3% for the entirety of the loan, meaning you don’t have to change your payments each month if you don’t want to. You can plan for every payment.
On the other hand, the adjustable-rate mortgage (ARM) does change. This rate fluctuates with the market. For most who sign on with an ARM, the rate will remain the same for a set period of time before beginning to fluctuate. Once the rate fluctuates, however, the borrower can’t always know what to expect.
Sometimes the rate can rise significantly, or sometimes it can fall. It is likely to change annually, so if it does increase, it might decrease next year. These payment plans are always tempting at first to the buyer because of the lower rate signing on, but the borrower must be willing to take a chance on a rising interest rate when choosing this plan.
Which is best for you?
It has a lot to do with where you’re at in life. Are you settled into your career, and expecting to spend in the next 30 years in this home? If so, then a 30 year fixed-rate mortgage can be just right for you.
You’ll always know what your payments will be and you’ll never have to worry about a rate increase.
On the other hand, maybe you aren’t sure where you’ll be in 30 years. Maybe this is your first home and, who knows, you could land a job in another city. In this case, the ARM could be more your style.
In the case that you move away in the first year or so, you’ve benefitted from the initial low interest rate.
There is also the possibility that you want a larger, more expensive home to settle down in and you can be approved for a bigger loan if you take the ARM. That’s your choice. There is nothing wrong with choosing this option just as long as you know the risks associated with it.