Which Type of Interest is Best? Adjustable- vs Fixed-Rate Mortgages

TAGS: Interest RatesFAQs
Which Type of Interest is Best? Adjustable- vs Fixed-Rate Mortgages
Article Excerpt

The interest on your mortgage payment is important to consider. The type of mortgage you choose could drastically affect the amount of interest you pay.

Choosing a fixed-rate mortgage could mean you miss out on a big chunk of savings. On the other hand, an adjustable-rate mortgage could cause your monthly payments to become unaffordable.

Adjustable- vs Fixed-Rate Mortgages

A fixed-rate mortgage has a monthly payment and interest rate that will never change over the life of the loan. They’re easy to understand, but you could end up paying more on your home in the long run.

Adjustable-rate mortgages, or ARMs, have interest rates that can rise and fall with the market. For most borrowers, that’s a lot of risk to assume. For others, an ARM may save them thousands.

Fixed rate mortgage logo

Which Type of Rate is Best for You?

Fixed-Rate Mortgage Advantages

Homes are expensive. With a purchase so significant, stability is important for many homebuyers. Housing expenses are a big part of your monthly budget considerations, and a fixed-rate mortgage helps that expense stay predictable. Here are some advantages to a fixed-rate mortgage:

  • Know your monthly payment for the life of the loan
  • Avoid payment shock when rates change
  • Lower the risk of defaulting on your mortgage payments
Adjustable rate mortgage logo

Adjustable-Rate Mortgage (ARM) Advantages

An adjustable-rate mortgage (ARM) is often considered too risky for most people because payments can change suddenly and drastically. While that’s true most of the time, it’s not true all of the time. There are cases (like buying a home under budget) where an ARM may make the most sense. If you’ve planned well and can absorb a rise in your monthly payment without too much stress on your finances, adjustable-rate mortgages can save you thousands.

Some of today’s ARMs even have the option to let you lock in an interest for the first three years of the loan – or longer! These hybrid ARMs can benefit people who plan to pay off significant portions of their home quickly or who plan to sell in a couple of years. Other benefits of an adjustable-rate mortgage include:

  • ARMs typically begin with lower interest rates than fixed-rate mortgages
  • Monthly payments could actually decrease if rates fall
  • Save big money in the first years of your loan

Get Help Making Your Decision

The adjustable- vs fixed-rate mortgage decision is a crucial one. Don’t guess at what’s best for you. Instead, speak with an experienced mortgage adviser who considers this decision with homebuyers every day.