Fixed vs. Adjustable-Rate Mortgage
When you’re ready to buy a home, the two main options are fixed-rate and adjustable-rate mortgages. While most homebuyers choose the traditional fixed-rate mortgage, an adjustable-rate mortgage (ARM) may better suit your needs. Learn more about each loan type and the advantages and disadvantages of each.
What Is a Fixed-Rate Mortgage?
A fixed-rate mortgage has interest rates that stay the same throughout the loan period. The most popular mortgage is a 30-year fixed-rate loan since the monthly payment stays the same and is lower than a 20-year or 15-year mortgage. The amount of principal and interest paid each month varies, as more of the payment in the early years is applied to the interest.
There are term options available with fixed-rate loans, and you can save a considerable amount if you choose a 15-year mortgage instead of a 30-year. Although your monthly payment will be more, the amount of interest paid over the life of the loan is much less. Read more about these options in our article, “30-year vs. 15-year Mortgage: Which Is Right for You?”
What Is an Adjustable-Rate Mortgage (ARM)?
An ARM usually has a 30-year term that begins with a set interest rate for a certain number of years. The initial rate is generally lower than a fixed-rate mortgage rate, but after that period, it can rise several times over the life of the loan. The most common ARMs have fixed rates for three, five, seven, or ten years.
Mortgage lenders use a format with ARMs to tell you how long the fixed interest period lasts and how often it’s adjusted. For example, a 5/6 ARM means the initial rate is fixed for five years and adjusted every six months after the initial period. ARMs also have caps that limit how much the interest rate can change at each adjustment period. They also have a ceiling that limits how high the rate can rise during the life of the loan.
Advantages & Disadvantages
The main advantage of a fixed-rate loan is that there are no surprises in your monthly mortgage payment. The borrower stays protected from sudden interest rate increases, which works to your advantage if you have a tight budget or plan to stay in that home for a long time. A primary disadvantage of fixed-rate mortgages is that it may be more difficult to qualify for a loan when interest rates are high.
One of the most significant advantages of an ARM is that the payment is usually lower than a fixed-rate mortgage for the initial period. This can help borrowers qualify for loans and take advantage of lower interest rates in a falling-interest-rate environment. It may also be beneficial if you don’t plan to stay in a home longer than the fixed-rate period. The biggest disadvantage of an ARM is that your monthly payment can fluctuate frequently over the life of the loan. If you took on a large loan, you could be in trouble when interest rates rise, making ARMs riskier than fixed-rate loans.
If you’re ready to buy your next home but are unsure where to start, our Texell Home Loan heroes are here to help. They’ll answer your questions and determine whether a fixed-rate or adjustable-rate loan is best for you. Visit TexellHomeLoans.com or call 254.774.5104 to learn more.
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