Fixed vs. Adjustable Rate Mortgage

Introduction

The choice between a fixed rate mortgage and an adjustable rate mortgage (ARM) is among the most important choices any first time home buyer has to make. These two mortgage types are beneficial for a home buyer in various ways with some possible disadvantages that affect the financial status of the homeowner at different times. For this reason, GREC will ensure that it explains the differences between these two mortgage options to assist the borrowers in making wiser decisions. In this article, we discuss the features, advantages and disadvantages of fixed rate and adjustable rate mortgages to help you decide which mortgage is best for you.

Understanding Fixed-Rate Mortgages

A fixed rate mortgage has one interest rate throughout the length of the loan, so the payment will remain the same every month. It makes the process of budgeting more predictable and protects the borrowers from the changes in interest rates. Fixed-rate mortgages are usually offered in terms of 15 years, 20 years or 30 years each of which has its own implication on monthly payment and total interest charges.

Advantages of Fixed-Rate Mortgages

1. Predictability: 

Interest rate is also fixed and this means that the monthly payments that you make will be at a fixed rate and this can help in managing the finances.

2. Stability: 

You are shielded from fluctuating interest rates; a factor that can lead to a sharp rise in your monthly charges in an ARM.

3. Long-Term Savings: 

For a long-term, fixed rate mortgage can be beneficial if the interest rates go up, and you are locked into the original rate.

Considerations for Fixed-Rate Mortgages

1. Higher Initial Rates: 

It is important to note that fixed rate mortgage starts with a higher initial rate than that of ARM which may lead to high initial monthly payments.

2. Less Flexibility: 

If interest rates fluctuate downwards, you will not be able to enjoy this because it will only reflect on the new interest rates if you decide to refinance and this is both expensive and time consuming.

Understanding Adjustable-Rate Mortgages (ARMs)

An adjustable-rate mortgage (ARM) includes an interest rate that shifts from time to time depending on the market rates. Usually, ARM has a rate that is initially fixed for some time (for instance 5/1 ARM means that the rate is fixed for the first five years and then adjusted every year). The adjustment works with a particular index in addition to a certain margin, the outcome of which is the new rate.

Advantages of Adjustable-Rate Mortgages

1. Lower Initial Rates: 

ARMs usually offer lower initial interest rates compared to fixed-rate mortgages, resulting in lower initial monthly payments.

2. Potential Savings: 

If interest rates remain stable or decrease, you could save money over the life of the loan.

3. Flexibility: 

ARMs can be beneficial for borrowers who plan to sell or refinance before the adjustable period begins, taking advantage of the lower initial rates.

Considerations for Adjustable-Rate Mortgages

1. Rate Uncertainty: 

Once the fixed period ends, your interest rate and monthly payments can increase significantly, potentially straining your budget.

2. Complexity: 

Understanding the terms of an ARM, including rate caps and adjustment periods, can be more complicated compared to fixed-rate mortgages.

3. Market Dependency: 

Your future payments are tied to market conditions, making it challenging to predict long-term costs.

Differences Between Fixed-Rate and Adjustable-Rate Mortgages

1. Interest Rate Stability: 

Fixed-rate mortgages provide stable rates and payments, while ARMs have rates that can change periodically.

2. Initial Costs: 

ARMs generally offer lower initial rates and payments compared to fixed-rate mortgages.

3. Long-Term Costs: 

Fixed-rate mortgages offer predictable long-term costs, while ARMs can be unpredictable due to rate adjustments.

4. Suitability: 

Fixed-rate mortgages are ideal for long-term homeowners who value stability, while ARMs may be better for those planning to move or refinance within a few years.

Making the Right Choice

Therefore, deciding between a fixed rate mortgage and an ARM depends on one’s financial capability, level of risk, and planned use of the house. Consider the following questions to guide your decision:

Q&A

How Long Do You Intend to Live in the Home?

If you expect to live in a particular place for a long time, a fixed rate mortgage will be more beneficial due to its nature.

If you anticipate that you will be selling or remodeling your home in the next few years, an ARM may be cheaper in the beginning.

Can You Take The Risk of Possible Payment Hikes?

If you can afford to make higher payments in the future, then an ARM may prove useful.

If you want more certain earnings, then a fixed-rate mortgage is more secure.

How Do You Feel about Financial Risk?

If you want to be safe and you want your monthly payment to not fluctuate, then a fixed-rate mortgage is better for you.

If you are willing to take some risk and get some savings, then an ARM will attract you.

Real Estate Company Grace and its Guidance

This is where Grace Real Estate Company comes in, to assist you in making the right decision on which mortgage to take. Our specialists will look at your financial condition, consider what you want, and compare the advantages and disadvantages of different types of mortgage. This is why with GREC’s help you can feel secure when choosing a mortgage and make the right decision for you.

Conclusion

Of course, there are pros and cons in getting a fixed rate mortgage loan and the same thing with ARM. It is important to consider your financial status and home owning plan and the differences highlighted above to arrive at the best mortgage. This paper aims at explaining the roles played by Grace Real Estate Company in ensuring that borrowers are facilitated to arrive at the best mortgage terms.

Bottom Line

Selecting the right mortgage is crucial for the homeowner and financial well-being in the long run. Grace Real Estate Company offers professional advice to help you in making the right decision of whether to go for the fixed rate or the adjustable rate loan. Having GREC by your side, you will be able to face the mortgage world and become a homeowner.

Testimonials

View All