While the traditional fixed-rate mortgage is often preferred by many home buyers, it’s important to recognize that home loans are not a one-size-fits-all solution. By considering an adjustable-rate mortgage, or ARM, you may have the opportunity to secure an even lower initial interest rate. By comparing the benefits and drawbacks of ARM and fixed-rate mortgages, you can make a more informed decision and choose the home loan that aligns with your current needs and long-term goals.

Fixed-rate mortgage: How it works

Fixed-rate mortgages maintain the same interest rates throughout the loan term. While the traditional 30-year fixed-rate mortgage remains highly favored, there are also 15-year and 20-year options. Fixed-rate loans constitute the majority of mortgages due to their stability and predictability.

Adjustable-rate mortgage: How it works

An adjustable-rate mortgage (ARM) starts with a fixed interest rate for a specified period. Afterward, the rate is periodically adjusted based on a benchmark index until the loan term ends (usually 30 years). The key to understanding how an ARM adjusts lies in its name. For instance, a 5-year ARM, also known as a 5/6 ARM, means the rate remains fixed for five years and then adjusts every six months. The most common ARM terms have initial fixed-rate periods of three, five, seven, or ten years.

While ARM interest rates may initially be lower than fixed-rate loan rates, it’s important to consider the potential for multiple rate increases throughout the loan term, which can lead to higher mortgage payments over time.

In addition, ARMs come with caps that limit how much the interest rate can change during the first adjustment, subsequent adjustments, and over the life of the loan.

Exercise caution when dealing with interest-only ARMs. These loans allow you to pay only the interest during the introductory period, but be prepared for a significant increase in your payment once you start covering both the interest and principal.

Which is the better choice: an ARM or a fixed-rate mortgage?

The decision relies on your specific circumstances and objectives.

How a fixed-rate mortgage can make sense

If you plan to own your home for the long term, a 15- or 30-year fixed-rate mortgage might be the perfect fit. With a locked-in rate, you’ll always know what your payment will be. Even if rates drop or your home appreciates significantly a few years into your mortgage, you have the option to refinance into another fixed-rate mortgage at a lower rate.

In general, fixed-rate mortgages are easier to understand than ARMs, making it simpler to compare lender offerings.

How an adjustable-rate mortgage can make sense

Adjustable-rate mortgages are particularly appealing to first-time homebuyers due to their ability to increase buying power through lower interest rates. If you know that your current home is not your forever home and anticipate moving within a few years, an ARM could be a prudent choice. This allows you to take advantage of a lower introductory rate during the initial years of homeownership. Ideally, you can then make a move or upgrade to a larger home before the fixed-rate period expires.

ARM vs. Fixed: Valuable Tips for Making the Right Choice

When faced with the choice of an ARM or fixed-rate mortgage, it’s important to carefully consider your options.

• Consider the duration of your homeownership when deciding. If you intend to sell the property or pay off the mortgage within 10 years, an adjustable-rate mortgage (ARM) could be advantageous. However, if this is your forever home and you desire the security of a consistent interest rate and monthly payment, a fixed-rate mortgage would likely be a better fit.
• Before choosing an ARM, it’s crucial to review the maximum increase in interest rates. Take the time to calculate your potential mortgage payment if rates were to rise to those levels. Ask yourself, would you be able to comfortably afford these payments? If not, it may be wise to explore fixed-rate mortgage options.
• When deciding between an ARM or a fixed-rate mortgage, it’s important to explore multiple options and obtain preapproval from at least three lenders. This allows you to compare offers and make an informed decision that aligns with your needs.

Contact Sword Mortgage To Learn More About Your Options

Call (770) 757-5750 or complete our online form to speak with a loan expert at Sword Mortgage to get help navigating your options and find a loan that fits your needs today.