After a significant period of steady interest rate increases, prospective homebuyers are considering alternative lending solutions to finance their homes. While the fixed-rate mortgage has been the go-to in recent years, some consumers are now choosing adjustable-rate mortgages (ARM) to lock in a potentially lower initial interest rate.
The decision between a fixed-rate mortgage and an adjustable-rate mortgage is a personal one and depends on a buyer’s individual circumstances and financial goals.
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage is a loan with an interest rate that won’t change throughout the life of the loan. This means your mortgage payment will not fluctuate except for taxes and insurance costs. Fixed-rate mortgages are typically offered in 15, 20, or 30-year terms.
The greatest benefit to a fixed-rate mortgage is the stability it offers a homebuyer. It’s ideal for a buyer who plans to keep their home for many years. With the convenience of a fixed rate, the buyer may have to pay a higher interest rate than they would if they chose an ARM.
What is an Adjustable-Rate Mortgage (ARM)?
An adjustable-rate mortgage is a loan with an interest rate that can adjust periodically based on market interest rates. This means that your monthly payment could go up or down, depending on the changes in interest rates.
ARMs typically have a fixed-rate period, followed by an adjustment period where the rate can rise or fall based on economic conditions. For example, a 5/6 ARM would offer a fixed rate for five years. After five years, the interest rate could change every six months. Depending on market conditions, the interest rate could rise or fall with each adjustment period.
An ARM may have a lower initial interest rate than a fixed-rate mortgage, making this type of loan more attractive to buyers who plan to move or refinance in a few years.
Factors to Consider when Choosing a Mortgage
When choosing between a fixed-rate mortgage and an ARM, it is important to consider the following factors:
- Your financial stability: If you have a stable income and are confident in your ability to make your monthly payments, an ARM may be a good option.
- Your risk tolerance: If you are not comfortable with the possibility of your monthly payments going up, a fixed-rate mortgage may be a better choice.
- Your plans for the future: If you plan to move within a few years, an ARM may be a good option.
- Current interest rates: If interest rates are currently low, a fixed-rate mortgage may be a good option.
Choosing the right mortgage can save you money and help you achieve your long-term financial goals.