Fixed Rate vs Adjustable Rate Mortgage Comparison

One of the questions we most often hear from our clients is “which is a better mortgage option for me: a fixed rate or adjustable rate mortgage?”

The fixed-rate mortgage and the adjustable rate mortgage, or ARM, are two of the most popular loan types for buying a home or refinancing a mortgage (including cash-out refinances) and each one has its unique set of advantages and disadvantages.

The low introductory rates of adjustable-rate mortgages can be very tempting for borrowers, but these types of loans may make you vulnerable to potential rate increases in future years.

A fixed rate mortgage on the other hand, offers rate and payment security, but it may mean higher monthly payments in the short term (although this is not always the case).

Read below about the advantages and disadvantages of each option, in order to get a better understanding of what each one involves.

Adjustable Rate Mortgages – Pros & Cons

Advantages of ARM loans:

• Lower rates and payments early on in the loan term – ARMs generally start at a lower introductory interest rate when compared to fixed rate mortgages so monthly payments will be lower during the initial fixed rate introductory period. Common ARMs have a set rate for one, three, five, seven or ten years. After that, the interest rate will be adjusted each year or during a intervals defined in the loan’s terms.

Adjustable Rate Mortgages Cons:

• Fluctuating Interest Rates – Because this type of loan allows for rate adjustments based on the terms of the loan and index rates currently available, the rate you pay could change annually following the introductory period.

• Rates and payments can rise significantly over the life of the loan – When the introductory period is over, your interest rate may change, which creates a level of uncertainty for how much to budget towards your mortgage.

Fixed rate mortgages – Pros & Cons

Fixed-rate mortgage advantages:

• Rates and payments remain constant – The advantage of a fixed rate is that the principal and interest portion of your payment will remain unchanged regardless of market conditions.

Fixed-rate mortgage cons:

• Higher initial monthly payments – No “introductory” promotional interest rate.

• Less flexibility – If interest rates fall, fixed-rate mortgage holders have to refinance to take advantage of them.

Both types of mortgages are available for conventional loans, jumbo loans, and government backed FHA and VA loan programs. Our USDA rural housing loans are currently only available as a fixed rate product.

Before settling on a type of mortgage, consider your current financial situation and your long-term goals. Are you looking to start with an initial lower monthly payment, such as the one offered by an Adjustable Rate Mortgage, or would you prefer the security of a Fixed Rate Mortgage?

Though the fixed rate loans are very popular, most people do not stay in their homes for 30 years. Studies have shown that the average homeowner owns their home for about 7 years. So ask yourself how long you are going to be in your new home. If the answer is five years, then you may want to consider an Adjustable Rate mortgage. Of course it’s critical that you think through whether you could manage a rate and payment increase were plans to change and you own the home longer than expected.

Be sure to consult with a licensed mortgage professional to learn more about some of the pros and cons of adjustable rate and fixed rate programs.