Fixed-Rate Mortgage or Adjustable-Rate Mortgage: Which One’s the King of Them All?
The two most popular options for purchasing a house are undoubtedly fixed-rate mortgage and adjustable-rate mortgage or ARM. Below, CityCreekMortgage.com shares the basic features, benefits, and potential risks to help you out in deciding which one’s right for you.
The Features of Fixed-Rate Mortgage and Adjustable-Rate Mortgage
With a fixed-rate mortgage, your mortgage rate and your monthly interest and principal payments stay the same for the entire loan period. It is available in a range of mortgage term options and can be supplemented with additional features depending on your lender.
On the other hand, with an adjustable-rate mortgage or ARM, your mortgage rate and interest and principal payments monthly will stay the same for a set time period of either five, seven, or 10 years, and can then be adjusted yearly. It can come in longer terms and features a cap or limit in the interest rate to limit the increase of your interest rate.
The Benefits of Fixed-Rate Mortgage and Adjustable-Rate Mortgage
In a fixed-rate mortgage, your monthly payments are set so you can easily factor these when you budget your funds. You are also protected from increasing interest rates because it is already “fixed.” Additionally, this mortgage loan option is great if you’re planning on staying in your house for a longer time.
With an ARM, your interest rate will be significantly lower than if you choose a fixed-rate loan. The rate cap also effectively protects your interest rate from increasing during the loan period. It will also offer flexibility for you if you’re planning on moving or refinancing your home after a couple of years or if you’re expecting an increase in your income in the near future.
The Potential Risks of Fixed-Rate Mortgage and Adjustable-Rate Mortgage
Generally, the overall interest you’ll be paying on a fixed-rate mortgage will be higher on a loan with longer terms than on a loan with shorter terms. Conversely, a loan with a shorter term will have higher monthly payments than a loan with a longer term. On the other hand, with an ARM, you risk the increase of your interest and monthly payments when rates are adjusted. In addition, your interest and monthly payments can be adjusted yearly once the fixed period has expired.
No one mortgage loan type is essentially better than the other — but having an understanding of two types mainly regarding their potential risks and benefits will put you in a position to make a more informed decision.