Even if you are relatively new to the home loan process, you probably know that one of the key decisions you will need to make is whether to purchase a home with a fixed rate mortgage or an adjustable rate mortgage (ARM).
To help you figure out which is right for you, we have put together a two-part guide. In this article, we will go over the pros and cons of fixed vs. adjustable rate mortgages. In the next, we will talk about situations where each is ideal. But first, let’s go over basic definitions.
What is a Fixed Rate Mortgage?
A mortgage with a fixed interest rate has a set rate which does not vary over time. For the loan’s entire lifetime, the mortgage rate remains the same.
What is an Adjustable Rate Mortgage?
Unlike a fixed rate mortgage, an adjustable rate mortgage has an interest rate which changes over time based on market rates. The rate can go up, come down, or stay the same.
Fixed Rate Mortgages: Pros
• With a fixed rate mortgage, you have the stability and assurance which comes with knowing what you can expect in the future as far as interest rate costs are concerned.
• Because there are no questions about what your interest will be years down the road, it is easier to run calculations forward and more accurately figure out what you can afford with respect to buying a home.
• You will never need to worry about the ballooning interest rates which caught so many homebuyers off-guard in the past.
Fixed Rate Mortgages: Cons
• A fixed rate mortgage is more expensive than an adjustable rate mortgage at the onset.
• If rates drop in the future, you will still be paying the same fixed rate you were initially. In some cases, this could mean that you are stuck with a higher rate than your neighbors until you refinance.
Adjustable Rate Mortgages: Pros
• The main advantage of an adjustable rate mortgage is that they come with low introductory rates for the first few years. This makes them less expensive than fixed rate mortgages to begin with.
• In situations where mortgage rates drop in the future, it is possible that your ARM could also be less expensive.
Adjustable Rate Mortgages: Cons
• Adjustable rate mortgages are unpredictable. If you are looking to maximize stability and minimize uncertainty, an ARM is not the way to do it.
• Ballooning rates are possible. If mortgage rates climb in the future, your adjustable rate mortgage could spiral out of control. This could make it harder to afford your mortgage, or even impossible in some scenarios.
Based on these pros and cons, you may already have a pretty good idea which type of mortgage interest rate would be most ideal for you. But if you are still looking for further guidance, read on to Fixed vs. Adjustable Rate Mortgages: Which Should You Choose?