Fixed-Rate vs. Adjustable-Rate Mortgages: What Homebuyers Should Consider

When financing a home, there are several options to consider. Both fixed-rate and adjustable-rate mortgages (ARMs) are strong options for home buyers. The smartest choice depends on numerous factors, including how long you plan to stay in the home and how much uncertainty you can take on. A.S.A.P. Mortgage Corp. compares fixed-rate vs. adjustable-rate mortgages to help you understand the difference and make an informed decision.

Key Takeaways

• Fixed-rate mortgages have an interest rate that stays static throughout the loan period and can lock in either low or high rates.
• Fixed-rate mortgages offer the benefit of long-term stability, predictable payments, and the opportunity to lock in a low rate if the market is good.
• Adjustable-rate mortgages (ARMs) have a short period of a low, fixed interest rate, after which the rate regularly changes based on market conditions.
• ARMs offer the benefit of short-term savings, especially if you plan on selling or refinancing before the first rate adjustment.

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage is a mortgage that keeps the same interest rate for the entire life of the loan. The interest rate is locked in, or fixed, at the time of taking out a loan. The fixed rate depends on the current market conditions and factors related to the borrower and loan. This means that, while rates are low, it is possible to lock in a low rate that will stay the same even when rates increase. Conversely, if the mortgage is taken while rates are high, then you’ll keep paying the higher rate unless you refinance.

Aside from the ability to lock in a low rate, the primary benefit of fixed-rate mortgages is stability. Principal and interest payments stay the same throughout the life of the loan, which allows for predictable payments and easy budgeting. This makes them the ideal option when you’re planning on staying in your home long-term and want enough stability to save.

What Is an Adjustable-Rate Mortgage?

An adjustable-rate mortgage (ARM) is one where the interest rate changes over time. The mortgage starts with a low introductory rate. This low-rate period lasts for a set period, usually five to seven years, before it starts to shift up and down based on the current market.

Long-term, an ARM can be unpredictable and expensive. Payments can rise significantly in an uncertain economy. However, in the short-term, an ARM can be cheaper. The lower initial payments help you qualify for a higher loan amount, and you’ll still be paying less for several years. ARMs are great if you’re planning to move or pay off the loan early. You can also refinance before the initial period ends, although that requires closing costs.

Questions Homebuyers Should Ask Before Choosing

Neither mortgage type is universally better. Instead, the ideal home loan depends on your financial situation and goals. Before choosing a mortgage type, consider the following:

• Timeline: Consider how long you plan on staying in the home. Fixed-rate mortgages are better for long-term stability, while an ARM can help you save on shorter stays.
• Stability: ARMs can be cheaper if you can handle fluctuations in your payments. If you need predictable budgeting, go with a fixed-rate mortgage.
• Goals: Fixed-rate mortgages help you plan for other financial goals. ARMs are better if you plan on paying off the loan quickly or expect a future rise in income.

If you aren’t certain which mortgage type is right for you, then talk to a broker at A.S.A.P. Mortgage Corp. Our team is made up of experts who can help first-time homebuyers understand the benefits of each loan type, guiding you toward the right choice for your family and finances.

Compare Mortgage Options Today

Get the best mortgage for your needs with A.S.A.P. Mortgage Corp. Our knowledgeable brokers can help you compare fixed-rate vs. adjustable-rate mortgages to understand the benefits, downsides, and risks of each, then help you secure the best deals across multiple lenders. We are a full-service brokerage firm with offices near you in the Mid-Hudson Valley region in New York, the NYC Metro area, and Florida, providing services across multiple states. Contact us today to learn more or apply now.

FAQs About Fixed-Rate vs. Adjustable-Rate Mortgages

What happens when an adjustable-rate mortgage adjusts?

An adjustable-rate mortgage changes, or adjusts, its interest rate at set intervals. At the adjustment date, the lender calculates the new interest rate using a specified financial index plus a set margin, subject to the loan’s adjustment caps. If market rates go up, then your monthly payment increases. If market rates drop, your interest rate and payment may decrease, depending on the terms of your loan.

What risks should buyers understand before choosing an ARM?

Before choosing an adjustable-rate mortgage, buyers should understand the uncertainty. ARM interest rates can rise significantly based on market conditions. Economic shifts can make interest rates climb, influencing your monthly payments. Buyers shouldn’t choose an ARM unless they can handle unpredictable payments or they have a plan for early repayment or refinancing.

How can a mortgage broker help compare fixed-rate and adjustable-rate loans?

A mortgage broker can help buyers compare their loan options across multiple lenders. The broker will analyze your timeline, calculate initial vs. long-term savings, and review worst-case scenarios to help you understand the risks of your loan selection. They then search multiple lenders to find the best rates and terms. By comparing each option side by side, they help you see the true cost of each.