Adjustable vs. fixed-rate mortgage: How do I know which is right for me?
There are many loan types available, and knowing which one is right for you isn’t always an obvious choice.
Thinking about your personal situation and goals, you’ll discover that part of the loan process will include you deciding on a fixed or adjustable rate.What is the difference?
A fixed-rate mortgage is just that – a loan that has a fixed rate for the life of the loan term you choose. An adjustable-rate mortgage (ARM) loan has a lower initial interest rate (creating a lower payment), and then can adjust at various intervals throughout the loan term.
Making sure you are educated about the advantages of both products will help you decide which is right for you.Fixed-rate mortgage benefits
- Rate remains constant for the entire term of the loan, regardless of what happens in the broader economy (e.g., interest rate increase).
- Payment (principal and interest) remains constant for the entire term of the loan, making monthly budget planning easier.
- Lower initial interest rates vs. fixed rate option.
- Payment (principal and interest) is initially lower.
Other items to ask yourself:
- How long will I be in this home? According to the National Association of Realtors, on average people live in their home for 10 years.
- Would I benefit from a lower initial payment with an ARM if I plan on moving soon?
- Am I prepared to make higher mortgage payments if my ARM adjusts with the market or at the end of the initial term?
- Do I fully understand how my ARM product works today and in the future?
Hopefully this helps clarify these two borrowing options. In every situation speaking with a mortgage expert today will help set you up to achieve your own personal goals for home ownership in the future.