Adjustable Rate vs Fixed Rate: Which One Is Best?May 7 2012
In addition to the various loan options you can choose from, most of these options come in various forms based on interest. The most commonly picked are Fixed and ARM.
What exactly does a Fixed and ARM mean and which one is a better option for you? We break it down for you here:
A fixed-rate mortgage is just as it sounds - whichever rate you lock in during your mortgage process is the rate you'll have for the remainder of your loan's term.
Advantages: Predictability. Your rates and payments will remain constant throughout your entire loan, making your budgeting easier.
Disadvantages: If rates fall, to take advantage of them, you would have to refinance.
ARM stands for Adjustable Rate Mortgage, which is a home loan that carries a rate that adjusts after a fixed period of time (typically 5 to 7 years). After this fixed period of time, the rate will change based on the current market and rate.
Advantages: Flexibility. You're able to take advantage of falling rates without refinancing. You may even be able to buy a larger home, since most lenders tend to use a lower payment to qualify ARM borrowers. It also offers you a cheap way to buy a home if you don't plan on living in one place for very long.
Disadvantages: ARMs can be difficult to understand and you're at the mercy of the current housing market. Your rates and payments can rise significantly over the life of the loan.
Which One Is Right For You?
You should consider a wide range of personal factors when deciding between a fixed-rate mortgage and an ARM. Individual finances and interest rates both are prone to rising and falling over the course of time.
An ARM is a great choice if your primary requirement is to have low payments in the near term, or if you don't plan on living in the property long enough for your rate to rise. An ARM may also be a good idea if current interest rates are high, but expected to fall. If rates are low and beginning to climb, locking in a low rate with a fixed-rate mortgage would be the best way to go.
To discuss all your options, contact your home purchase expert.