Fixed-Rate or Adjustable? What to Consider When Choosing a Mortgage
- Homeowner Central
- Frontwave Credit Union
You’ve done your homework on the real estate market and decided you’re ready to apply for a mortgage. Seems like it should be easy right? Well, as you’ll soon find out, there are a lot of choices to make when it comes to picking a mortgage! One of the first things you’ll have to decide is whether to go for a fixed-rate mortgage or an adjustable-rate mortgage (ARM).
What’s the Difference?
Interest rates come in two basic types: fixed or adjustable. So when we talk about fixed-rate and adjustable-rate mortgages, we’re talking specifically about the interest rate and whether it can change.
A fixed-rate mortgage is exactly what it sounds like: a fixed interest rate for the life of your loan. This also means that your monthly principal and interest payment will stay the same for as long as you have the loan. Here at Frontwave, we offer fixed-rate mortgages with terms of 10, 15, 20 and 30 years available.
With an adjustable-rate mortgage, the interest rate can change over time. Just how often it can change varies depending on the specific loan type, but it’s usually spelled out in the name. For example, you may see options such as a “5/1 ARM” or a “3/3 ARM.” In general, the first number tells you how long the initial rate is in effect, and the second number tells you how often the rate can change after that. So for a 5/1 ARM, the initial interest rate stays the same for the first 5 years and can change once a year after that for the life of the loan. For a 3/3 ARM, the initial rate stays the same for the first 3 years and can change every 3 years after that.
How much can the interest rate on an ARM change? That again depends on the exact loan. It’s usually a set percentage added to an indexed rate, and can be found in the fine print of the loan terms. Many lenders, including Frontwave, put annual and lifetime caps on their ARMs to help limit overall rate increases.
Pros vs. Cons
The main benefit of a fixed-rate mortgage is locking in your interest rate and, therefore, your monthly principal and interest payment. If you want to know exactly what you’ll be paying each month for the next 15, 20 or 30 years, fixed-rate is where it’s at. The downside is that fixed-rate mortgages often have higher interest rates as compared to ARMs. So in turn, your payment may be higher than if you went with an ARM.
In the same vein, the upside (and often appeal) of an ARM is a lower initial interest rate. This can help keep your monthly payment a little lower to start, which may even help you be able to afford a little extra house. The downside is that your interest rate is more uncertain over the long run. It could go up or down in the future, which means your monthly payment could also go up or down.
What’s Right for You?
In general, if you think interest rates are likely to rise in the future, your income is likely to stay the same and/or you’re planning to stay in your home for the long haul, a fixed-rate mortgage may be the way to go. On the other hand, if you think overall interest rates are due to drop, your personal fortunes are bound to rise, or you plan to move on in a few years, an ARM may be a better bet. In a lot of ways, it comes down to how much risk you want to take on. To put it in perspective, according to the Consumer Financial Protection Bureau, between 2008-2014, about 85-90% of buyers chose a fixed-rate mortgage and 10-15% chose an ARM.
Ultimately, the best type of loan for you depends on many factors. To learn more, give one of our friendly Home Loan Consultants a call at 760.631.8717 or sign up for one of our upcoming Home Buying workshops. Or if you already know what mortgage type is right for you, click here to apply!