Adjustable-Rate Mortgage vs. Fixed Rate Mortgage

Which mortgage option works best for you: adjustable-rate-mortgage (ARM) or fixed rate mortgage? The low interest rate and therefore lower monthly cost of an adjustable-rate mortgage can appear very inviting in the short term. Fixed rate mortgages come with a definitive interest rate but can end up being more expensive.

Following is a list of pros and cons for you to consider:

Adjustable-Rate Mortgages / PROS

• Lower interest rates and therefore lower payments at the beginning of the loan. Because lenders can use the lower payment when qualifying borrowers, borrowers can afford more expensive homes than they might qualify for with a fixed-rate mortgage.
• Allows borrowers to take advantage of falling rates without refinancing. Instead of having to pay a whole new set of closing costs and fees, rate decreases are automatic.
• Invest your savings. Someone who has a payment that's $100 less with an ARM than with a fixed-rate mortgage can save that money in a higher-yielding investment.
• Offers a more inexpensive method for borrowers who don't plan on living in one place for very long to buy a house.

Adjustable-Rate Mortgages / CONS

• Rates and payments may increase during the life of the loan.
  
• Some annual caps don't apply to the initial change. An annual cap of 2 percent and a lifetime cap of 6 percent could theoretically cause the rate to increase from 6 percent to 12 percent the first year if rates increase.
  
• Adjustable-Rate Mortgages are often difficult to understand. Lenders have more flexibility when determining margins, caps, adjustment indexes and other things, so unsophisticated borrowers can easily get confused or trapped by shady mortgage companies.
  
• On certain adjustable-rate mortgages called negative amortization loans, borrowers can end up owing more money than they did when the loan began.

Fixed-Rate Mortgages / PROS

• Rates and payments remain the same throughout the term of the mortgage.
  
• Budgeting is much easier. You can manage your money with confidence knowing you have set payments.
  
• Fixed-rate mortgages are easy to understand.

Fixed-Rate Mortgages / CONS

• If rates fall, those with a fixed rate mortgage must refinance in order to take advantage of the lower interest rates. This involves out-of-pocket money for a new appraisal, application fee and associated closing costs.
  
• Can be costly in high-rate interest environments.

You should consider the following when deciding between adjustable or fixed rate mortgages:

1. Length of time you will own the home. Adjustable rate mortgages are often the best choice for short-term occupancy.

2. How often will the adjustable rate adjust? Some adjustable rate mortgages adjust every month. This can make monthly budgeting difficult.

3. How high are current rates? In a high-interest rate environment, an adjustable-rate mortgage is often a good choice. The lower initial rates give borrowers time for rates to fall to “lock in” a better rate, without the inconvenience and cost of refinancing and with lower initial monthly payments.

4. If interest rates increase dramatically will you still be able to afford your mortgage? The interest rate on adjustable rate-mortgages can increase as much as 6 percent in one year.

LendingLeaders will match you lenders who specialize in providing both adjustable-rate and fixed-rate mortgage loans. The lenders will work with you to help decide what mortgage options are right for your situation. To have one of our lenders contact you to help decide what type of mortgage is right for you, simply fill out the quick, no obligation loan form by clicking here.