A mortgage is a major decision. To make the right choice, it’s important to first understand the differences between adjustable rate mortgages and fixed rate mortgages.
Both options have unique benefits, so the final decision will depend on factors like your home needs and available budget. Here are the key factors for each mortgage type and the things to consider to help you figure out what option is best for you.
What is a Fixed Rate Mortgage?
A fixed rate mortgage means that the interest rate remains the same throughout the entire duration of the loan. So with this option, the interest rate that you have when you sign your mortgage will last the life of the loan without going up or down.
What is an Adjustable Rate Mortgage?
An adjustable rate mortgage (ARM) has an interest rate that changes over time. It will begin with an interest rate that stays the same for a set number of years, then the interest rate will be subjected to change during specific periods.
How often the interest rate could change on an adjustable rate mortgage depends on the particular mortgage. The first number in an ARM refers to how long the initial interest rate will be good for and the second number usually refers to how often the interest rate can change after the set period ends.
For example, a 3/3 ARM would mean that the initial interest rate would last for 3 years, then be subject to change every 3 years thereafter. A 10/1 ARM would mean that the initial interest rate would last 10 years, then be subject to change once a year after the 10 years are up.
What are the Major Differences between Fixed Rate and Adjustable Rate Mortgages?
Obviously, the biggest difference between these two mortgage types is that one has a consistent interest rate and the other has a variable interest rate that changes over time.
However, there are also differences in the interest rate itself. Fixed rate mortgages are typically a higher interest rate than the initial period of an adjustable rate mortgage.
Also, you may be able to qualify for a larger loan if you choose an adjustable rate mortgage over a fixed rate mortgage.
How to Choose the Right Mortgage for You
Before you begin to decide, examine your current and future needs. Here are some basic questions to consider when choosing a mortgage:
- How much can I put down?
- What is my overall budget?
- How long do I plan on staying in the home?
- How is my financial standing/credit score?
- Am I comfortable with and will I be able to handle changes in mortgage payments?
- What’s the interest rate environment like?
These questions will help you start to see which mortgage option might be better for you. If you want lower initial mortgage payments, an adjustable rate mortgage could be a good option. If you want the stability of a consistent rate, fixed rate mortgages might be a better choice. If you don’t expect to live in the house long-term, an ARM could possibly help you save money with the lower initial interest rate.
Both mortgage types have a number of options that can suit your needs. Good luck and happy house hunting!