Mortgage: Fixed vs. Adjustable-Rate ARM
When you’re buying a home, one of the most important decisions you’ll make is what type of mortgage to get. There are two main types of mortgages: fixed-rate and adjustable-rate (ARM’s). Each type of mortgage has its own pros and cons, and the right choice for you will depend on your financial goals and situation.
Fixed-Rate Mortgages
A fixed-rate mortgage is a loan with an interest rate that stays the same for the entire term of the loan, usually 15 or 30 years. This means that your monthly payments will be the same every month, regardless of changes in the economy or the housing market. Fixed-rate mortgages are often considered to be the most stable and predictable option, making them a good choice for people who want to know exactly how much their mortgage payment will be each month.
Pros of Fixed-Rate Mortgages
- Stable monthly payments
- Predictable long-term costs
- Good for people who want to know exactly how much their mortgage payment will be each month
Cons of Fixed-Rate Mortgages
- Higher initial interest rate than adjustable-rate mortgages
- May not be the best option for people who expect their income to increase over time
Adjustable-Rate Mortgages
An adjustable-rate mortgage (ARM) is a loan with an interest rate that changes over time, usually based on an index such as the LIBOR rate. The interest rate on an ARM will typically start out lower than the interest rate on a fixed-rate mortgage, but it can increase over time. This means that your monthly payments could also increase over time. ARMs are often considered to be riskier than fixed-rate mortgages, but they can also be a good option for people who are looking for a lower initial interest rate.
Pros of Adjustable-Rate Mortgages
- Lower initial interest rate than fixed-rate mortgages
- Good for people who expect their income to increase over time
Cons of Adjustable-Rate Mortgages
- Increasing monthly payments
- Unpredictable long-term costs
- May not be the best option for people who want to know exactly how much their mortgage payment will be each month
Choosing the Right Mortgage
The right type of mortgage for you will depend on your financial goals and situation. If you want to know exactly how much your mortgage payment will be each month, a fixed-rate mortgage may be the best option for you. If you are looking for a lower initial interest rate, an ARM may be a good option. However, it is important to be aware of the risks associated with ARMs, and to make sure that you can afford the potential increase in monthly payments. Choosing which Mortgage: Fixed vs. Adjustable-Rate ARM is an individualized decision.
Talk to your lender to learn more about the different types of mortgages and which one is right for you.