When it comes to buying a home, one of the most important decisions you’ll make is choosing between an adjustable-rate mortgage vs a fixed-rate mortgage. Both types of mortgages have their pros and cons, so it’s important to understand the differences between them in order to make an informed decision. Let’s discuss the difference between adjustable-rate mortgages vs fixed-rate mortgages and some of their benefits and disadvantages.
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Adjustable-Rate Mortgages vs Fixed-Rate Mortgages: The Basics
An adjustable-rate mortgage (ARM) is a loan where the interest rate can change over time. The initial rate is set for a certain period—usually 5-10 years—and then adjusts up or down based on market conditions and other factors such as the creditworthiness of the borrower. On the other hand, a fixed-rate mortgage is based on the interest rate at the time of taking the loan and stays the same for the entirety of its life—typically 15 or 30 years. Therefore, you’re always paying the same amount every month until it is paid off.
Pros of Adjustable-Rate Mortgages
The biggest advantage of an adjustable-rate mortgage is that the initial interest rate is usually lower than a fixed-rate mortgage. This can make it easier to afford your monthly payments, which can be especially helpful if you’re a first-time homebuyer or have a lower income. Additionally, if interest rates go down in the future, your monthly payments could decrease as well.
Cons of Adjustable-Rate Mortgages
ARMs can be a double-edged sword because—just as your rates can decrease—they can increase too. If interest rates rise significantly after you take out your loan, your monthly payments could go up dramatically, making it difficult to afford your mortgage.
Pros of Fixed-Rate Mortgages
One of the benefits of a fixed-rate mortgage is the stability it offers. With a fixed-rate mortgage, you know exactly what your monthly payments will be for the entire life of the loan. This can make it easier to budget and plan for other expenses. These are especially advantageous when interest rates are low, where you can lock yourself in and protect yourself from any rising rates in the future.
Cons of Fixed-Rate Mortgages
Compared to ARMs, the initial interest rate for a fixed-rate mortgage is usually higher. Additionally, if interest rates go down in the future, you won’t be able to take advantage them unless you refinance your mortgage.
Which Mortgage is Right for You?
When considering an adjustable-rate mortgage vs fixed-rate mortgage, your individual financial situation and goals will be an important factor. If you plan to stay in your home for a long period of time and value stability and predictability in your monthly payments, a fixed-rate mortgage may be the best option for you. On the other hand, if you plan to sell your home in the near future or value lower monthly payments now, an adjustable-rate mortgage may be a better fit.
Metropolitan Title partners with mortgage lenders who fully understand the details and potential advantages and risks of each type of mortgage. Have questions about mortgage types or other steps involved in the home buying process? Contact us today!