For many people, buying a home is the biggest financial decision they will make in their lifetimes. And, one of the most important decisions you’ll have to make when obtaining a mortgage is whether to choose a fixed-rate or adjustable-rate mortgage. In this article, we’ll explore the differences between these two types of mortgages and help you determine which one is right for you.
Fixed-Rate Mortgages
How They Work
A fixed-rate mortgage is a type of loan for which the interest rate remains the same for the entire term of the loan. This means that your monthly mortgage payments stay the same, making it easier to budget and plan for the future.
Benefits of a Fixed-Rate Mortgage
One of the biggest benefits of a fixed-rate mortgage is the stability it provides. You don’t have to worry about fluctuations in interest rates, which can make it easier to plan your finances. Fixed-rate mortgages are also often easier to understand and more predictable than adjustable-rate mortgages.
Drawbacks of a Fixed-Rate Mortgage
The main drawback of a fixed-rate mortgage is that you may end up paying a higher interest rate than you would with an adjustable-rate mortgage if interest rates drop. This is also in part because the lender is taking on more risk by fixing the interest rate, and they may charge a higher rate to compensate for that risk.
When to Choose a Fixed-Rate Mortgage
A fixed-rate mortgage may be the right choice for you if you plan on staying in your home for a long time or if you prefer the stability and predictability of fixed monthly payments. If interest rates are low when you obtain your mortgage, a fixed-rate mortgage can also be a smart financial choice, as you can lock in a low rate for the entire term of your loan.
Adjustable-Rate Mortgages
How They Work
An adjustable-rate mortgage, or ARM, is a type of loan for which the interest rate can fluctuate over time. The interest rate is usually fixed for an initial period, such as five or seven years, and then it can be adjusted annually based on market conditions.
Benefits of an Adjustable-Rate Mortgage
One of the biggest benefits of an adjustable-rate mortgage is that you may end up paying a lower interest rate than you would with a fixed-rate mortgage. This is because the lender is taking on less risk by allowing the interest rate to adjust over time, and because market fluctuations can lead to lower interest rates. Adjustable-rate mortgages can also be a good choice if you plan on selling your home or refinancing in the near future.
Drawbacks of an Adjustable-Rate Mortgage
The main drawback of an adjustable-rate mortgage is the uncertainty it can create. Because the interest rate can fluctuate over time, it can be difficult to predict your monthly mortgage payments, making it harder to budget and plan for the future.
When to Choose an Adjustable-Rate Mortgage
An adjustable-rate mortgage may be the right choice for you if you plan on staying in your home for a short period of time, such as five to seven years. If interest rates are high when you obtain your mortgage, an adjustable-rate mortgage can also be a smart choice, as you can take advantage of lower rates as they become available.
Tips for Choosing the Right Mortgage Type
Consider Your Financial Goals
When choosing between a fixed-rate and adjustable-rate mortgage, it’s important to consider your financial goals. If you value stability and predictability, a fixed-rate mortgage may be the better choice. If you want to take advantage of potentially lower interest rates, an adjustable-rate mortgage may be the better choice.
Compare Interest Rates
When choosing a mortgage, it’s important to compare interest rates from different lenders. Be sure to compare the interest rates for both fixed-rate and adjustable-rate mortgages to determine which option is more affordable for you. Don’t forget to factor in any additional fees, such as origination fees or closing costs.
Understand the Terms and Conditions
Before you sign on the dotted line, make sure you fully understand the terms and conditions of your mortgage. Pay close attention to the interest rate, the length of the loan term, and any prepayment penalties. If you have any questions or concerns, don’t hesitate to ask your lender for clarification.
Get Professional Advice
If you’re still unsure which type of mortgage is right for you, consider seeking advice from a financial professional. A mortgage broker or financial advisor can help you navigate the complexities of different types of mortgages and help you choose the one that best suits your needs.
Choosing between a fixed-rate and adjustable-rate mortgage is an important decision that can have a significant impact on your finances. Fixed-rate mortgages offer stability and predictability, while adjustable-rate mortgages can provide more flexibility and potentially lower interest rates. By considering your financial goals, comparing interest rates, understanding the terms and conditions, and seeking professional advice, you can choose the mortgage that best suits your needs.
Resource Links
Charles Schwab: Fixed-Rate Mortgage vs. ARM: How Do They Compare?
Consumer Financial Protection Bureau: What Is the Difference Between a Fixed-Rate and Adjustable-Rate Mortgage (ARM) Loan?