Mortgages: Differences between ARM and Fixed Rates

When it comes to taking out a mortgage, there are several options available, and it's essential to understand the difference between them to make an informed decision. Two common types of mortgages are adjustable-rate mortgages (ARMs) and fixed-rate mortgages. Let's explore the differences between these two types of mortgages.

Fixed-Rate Mortgages

Fixed-rate mortgages are the most common type of mortgage. They are popular because they offer a predictable monthly payment throughout the life of the loan. A fixed-rate mortgage typically has a term of 15, 20, or 30 years, and the interest rate is fixed for the entire term.

With a fixed-rate mortgage, the interest rate is determined when you take out the loan and remains the same for the entire term. This means that your monthly mortgage payment remains the same, providing stability and predictability.

Adjustable-Rate Mortgages

Adjustable-rate mortgages, also known as ARMs, are mortgages where the interest rate adjusts periodically throughout the life of the loan. The initial interest rate is typically lower than the interest rate on a fixed-rate mortgage, making it an attractive option for those who plan to sell their home or refinance before the interest rate adjusts.

Adjustable-rate mortgages typically have a fixed interest rate for a period of 5, 7, or 10 years, after which the interest rate will adjust based on the current market rates. The interest rate on an ARM is tied to an index such as the prime rate or LIBOR, and the rate will adjust up or down based on the index.

The Pros and Cons

So, which type of mortgage is right for you? It depends on your financial situation and goals.

Fixed-rate mortgages offer stability and predictability, which is appealing for many homeowners. You'll always know what your monthly mortgage payment will be, making it easier to budget and plan for the future. However, the interest rate on a fixed-rate mortgage is typically higher than the initial rate on an ARM, which can result in higher monthly payments.

Adjustable-rate mortgages offer lower initial interest rates, making them attractive for those who plan to sell or refinance before the rate adjusts. However, there is the risk that the interest rate could increase, resulting in higher monthly payments.

In Conclusion

In summary, fixed-rate mortgages offer stability and predictability, while adjustable-rate mortgages offer lower initial interest rates. The decision between the two ultimately depends on your financial situation and goals. It's essential to speak with a knowledgeable mortgage professional to determine which option is best for you.