Adjustable or Fixed-Rate Mortgage: How Do I Know What’s Best for Me?

Housing markets throughout the country are experiencing high demand and low supply. If you’re one of the many house hunters in your local market, you’ll want to be prepared to pull the trigger when you find the perfect home.

Most homeowners need to finance or borrow money to purchase their home. Having a solid understanding of the differences between mortgages—and determining which one is best for you—is one of the first steps in the home-buying process.

Adjustable and fixed-rate mortgages are the two primary mortgage options—with the biggest difference being that an adjustable-rate mortgage (ARM) fluctuates, and a fixed-rate mortgage stays the same throughout its course.

Adjustable-Rate Mortgage

An ARM is a home loan that adjusts over time based on the market. If interest rates drop, ARMs can fall below fixed-rate mortgages. However, if rates go up, ARMs can become increasingly more expensive.

Homebuyers can be enticed to pursue ARMs because, initially, their interest rates are lower than fixed-rate mortgages. But this low interest rate doesn’t usually last forever. After the initial phase, rates fluctuate throughout the life of the loan, which can create uncertainty for homebuyers.

The type of ARM selected is how the mortgage is identified. In a 10/1 interest rate, for example, the 10 stands for an initial fixed rate for 10 years—and the 1 means the interest rate is subject to change each year thereafter. With a 5y/6m ARM, the rate is fixed for the first five years, and then it’s subject to change every six months following that initial period.

ARM Pros:

  • Low introductory rates
  • Can take advantage of lower interest rates without refinances
  • More options for loan terms

ARM Cons:

  • Complexity
  • Rate fluctuation makes budgeting difficult
  • If rates rise, payments can increase significantly

Fixed-Rate Mortgage

A fixed-rate mortgage is just that—fixed. Because the interest rate stays constant throughout the life of the loan, a fixed-rate mortgage can give homebuyers more predictability.

With fixed-rate mortgages, you’re protected if rates increase—and your payments don’t change. If rates drop significantly or your home appreciates in value, you might find yourself refinancing your fixed-rate mortgage into another, lower fixed-rate mortgage.

Fixed-rate Mortgage Pros:

  • Protected against higher interest rates
  • Consistent payment amount makes planning and budgeting easier
  • Easier to understand and little variation between lenders

Fixed-rate Mortgage Cons:

  • Harder to qualify when interest rates are high
  • Must refinance to take advantage of lower interest rates, re-pay borrowing fees
  • Not customizable

Things to Consider

There are several considerations to help determine the right mortgage for you.

How long will you be in the home?

If you’re a first-time homebuyer—or move frequently—perhaps you only envision being in the home for a few years. In this case, taking advantage of the lower introductory rates of an ARM could mean huge savings.

For someone buying their “forever” home, the predictable, locked-in interest rate of a fixed-rate mortgage might be the best fit.

Can you afford it?

It’s important to consider how much you can afford—both today and long-term. Can you still afford the ARM payments if interest rates rise? Market research will help determine if rates are trending high or low, and if they are projected to continue moving in that direction. Try to gauge how payments could look down the road—and whether you’d be comfortable with those numbers.

What are the details of the ARM?

Make sure you have a clear understanding of when and how often the ARM adjusts. Sometimes it’s the anniversary of the mortgage, sometimes it’s more than once throughout the year. Does that work for you, or will the uncertainty put you in a bad spot?

A Final Word on Mortgages

Regardless of which mortgage option you choose, carefully considering all factors can help you avoid costly mistakes as a homebuyer.

At Sunrise Banks, we believe that each homebuyer’s journey is different. Our mortgage lenders strive to understand your specific needs to find a loan option that best suits your path to homeownership.

Sunrise Banks, N.A., Member FDIC 

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