types of mortgages

Fixed vs adjustable rate mortgages: the pros and cons

When applying for a mortgage, you’ll inevitably be faced with choosing between fixed-rate mortgages and adjustable-rate mortgages (ARMs). This may seem simple enough, but still it’s a choice worth thinking about. While the marketplace offers a variety of options within these two categories, the first step is deciding which primary loan type best suits your needs.

The basic distinction that should be made between the two types right off the bat is that a fixed-rate mortgage offers a set interest rate which remains the same throughout the entire duration of the loan, while an adjustable-rate mortgage (ARM) offers borrowers an initial interest rate below the market rate—the rate then rises or falls over time. Because ARMS are the more complex of the two types, they are typically considered a bit riskier.

Beyond the basic differences, however, how do you know which mortgage type is better suited to your unique goals and needs as a homebuyer? Let’s compare, shall we?

Fixed rate mortgages

Pros:

  • Your rates stay consistent, which means your payments stay the same over time.
  • The stability of knowing what you’ll be spending on your mortgage X years from now makes budgeting more manageable.
  • Fixed rates are simple and easy to wrap your mind around, which makes them well-suited to first-time homebuyers who might not be ready to immerse themselves in the finer intricacies of ARMs.

Cons:

  • Fixed-rate loans generally can’t be customized—one lender gets the same deal as any other.
  • If interest rates should happen to fall and you wish to take advantage of this, you’ll need to refinance—which typically involves paying borrower’s fees all over again.
  • If you lock in your loan at a rate that’s relatively high and don’t bother refinancing as rates fall, you may end up paying more interest in the longterm than you initially bargained for.

Adjustable rate mortgages

Pros:

  • You get lower rates and lower payments early on. This may enable you to purchase a more expensive home than you might otherwise be able to.
  • You can take advantage of dropping rates without the need to refinance. Instead, your rates simply drop with no extra effort or costs on your part.
  • The money saved on an ARM may make it easier to save and therefore put money into a lucrative investment.
  • If you don’t plan on staying in your home long enough for rates to rise, an ARM may be an ideal choice.

Cons:

  • It’s always possible that interest rates (along with your monthly payments) will rise significantly—if you’re not prepared for this, it can turn your budget on its head.
  • Your interest rate remains constant for a fixed period, after which it adjusts at a pre-arranged frequency. Although there are caps on how much your rate can increase each adjustment period, these typically don’t apply to your first loan reset, so when it changes, it can come as a real surprise.
  • While there is more flexibility with regard to caps, adjustment indexes, and various other factors, it can be easy to get confused and overwhelmed.

Bottom line: understanding the key differences between fixed-rate mortgages and ARMs is the smart way to ensure you go the route that works best for you. If you feel you could use the guidance of an expert, enlisting the help of a qualified mortgage broker can go a long way toward helping you land the right mortgage—on the best possible terms!


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