When applying for a mortgage, you are presented with many options. Whether you are purchasing a new home or refinancing your current home, you can choose between a standard fixed-rate home loan and an adjustable rate mortgage (ARM). Both loan options are popular for a variety of reasons.
What's the difference between a fixed-rate and an adjustable-rate home loan? The interest rate on a fixed-rate mortgage is set when you take out the loan and does not change throughout the term of the loan. With an adjustable rate mortgage, the interest rate is typically fixed for the first 5, 7 or 10 years (depending on the type of the loan) and then the rate adjusts according to the market. For example, with a 5/1 ARM, your interest rate is fixed for the first five years and then adjusts.
Benefits of an Adjustable Rate Mortgage
ARMs have many benefits, including:
- Lower interest rates: Adjustable rate mortgages carry lower interest rates than standard fixed-rate loans.
- Lower monthly payments: Because the interest rate is lower, ARMs have lower monthly payments than equivalent fixed-rate loans.
- Rate can't spiral out of control: While adjustable-rate mortgages are tied to the LIBOR and Treasury indexes, once the ARM's fixed-rate period ends, interest rate fluctuations are regulated. Rate increases are capped at 5 percent above your initial rate and no more than 2 percent year.
- Take advantage of lower rates: Since ARMs adjust according to market conditions, homeowners with an adjustable rate mortgage do not need to refinance to take advantage of falling interest rates.
Benefits of a Fixed Rate Mortgage
Some of the benefits of a fixed-rate home loan include:
- Fixed monthly payments: The payment on a fixed-rate loan will never change for the life of the loan.
- More stability: Budgeting is much easier when you know exactly what your mortgage payment will be every month.
- Easier to understand: Fixed-rate loans are pretty standard and vary little from lender to lender.
Deciding between a fixed rate or adjustable rate mortgage
All of these factors should be considered when choosing between an ARM or fixed-rate mortgage. But other factors, such as how long you plan to stay in the home and what the interest rate environment looks like, should come into play as well. Call us today for a free consultation and our team can help you decide what is right for your current situation.
