Fixed Rate vs Adjustable Rate Mortgages
What are the main differences?
When it comes time to choosing a mortgage type, a decision faced by many home buyers is whether to choose a Fixed Rate Mortgage, or an Adjustable Rate Mortgage (ARM). At their core they are simple to understand—a fixed rate mortgage includes a rate that won’t change over the policy term, and an adjustable rate includes a rate that can (and likely will).
But with all financial instruments, simplicity doesn’t last long.
What Is A Fixed Rate Mortgage?
A fixed rate mortgage is a mortgage that fully locks in both your interest and principal payments for the life of the loan. Term lengths will typically last for between 15 and 30 years.
What Are The Pros Of A Fixed Rate Mortgage?
Whether it be politically, socially, or economically, 2020 has been a year of great change and wild fluctuations. For many first time home buyers, the notion of being able to lock in one steady interest rate for the entire life of their loan is proving attractive. And despite the challenges we face today, one area that has remained fairly steady are the interest rates being offered to American consumers by our banks. A fixed rate mortgage gives you the total piece of mind to always know how much you need to pay in both interest and principal.
What Are The Possible Cons Of A Fixed Rate Mortgage?
The tradeoff of course being that during this period of time, your principal and interest will not change—even if interest rates get even lower than they currently are now.
What Typical Terms Are Offered On Fixed Rate Mortgages?
Most lending institutions offer a mortgage of somewhere between 15 and 30 years which includes a fixed interest rate (and anywhere in between). As the term lengthens, so do the payments and the interest. Meaning that the best way to avoid paying more interest is by paying off the loan as quickly as you can.
What Is An Adjustable Rate Mortgage?
Simply put, an adjustable rate mortgage has an interest rate that can and very likely will change throughout the lifetime of the loan. It is subject to external pressures and market forces. The interest, however, doesn’t change at will—it has fixed periods inside the life of the loan where the interest remains the same. For example, an ARMmay have a term of 30 years, with a 5 year fixed interest term before readjusting.
Pros Of An Adjustable Rate Mortgage
An ARM-type loan can be beneficial for those who believe that interest rates will become lower again before the full span of their mortgage has lapsed. Moreover, It can also be helpful for homeowners who are looking to pay off their mortgages earlier than expected. And lastly, Despite risks of raising interest rates, the American Federal Government does offer a cap protection from the rates getting too high for consumers.
Cons Of An Adjustable Rate Mortgage
The clear downside of an ARM mortgage is that borrowers could quite possibly face higher interest rates and eventually end up paying more for their homes than had they chosen a more standard, fixed rate mortgage.
Fixed Rate Versus Arm Which Is The Right Choice For You?
This is very much a personal question that has everything to do with your specific financial goals and situation. or more information on other types of financial instruments as well as a mortgage calculator—please explore the rest of MoneyWizard. The research we do isn’t magic—but it’s close!