Which is the better mortgage option for you: fixed or adjustable?
There are lots of ways to finance a home in today’s economy. For all mortgage applicants, though, it will eventually be time to decide whether to use a “fixed rate” or “adjustable-rate” mortgage. Each has its merits and drawbacks, and with a loan representative guiding you through the process, you’ll be in position to decide which loan type is best for you.
The low initial cost of adjustable-rate mortgages, or ARMs, can be tempting to homebuyers, yet they carry a degree of uncertainty. Fixed-rate mortgages offer rate and payment security, but they can be more expensive.
Here are some pros and cons of adjustable-rate and fixed-rate mortgages.
Adjustable-rate mortgage (ARM)
Advantages:
- Feature lower rates and as a result, borrowers can buy larger homes than they otherwise could buy
- Allows borrowers to take advantage of falling interest rates without refinancing.
- Helps borrowers save and invest more money.
- Offers a less expensive way for borrowers who don’t plan on living in one place for very long to buy a house.
Disadvantages:
- Rates and payments can rise significantly over the life of the loan.
- ARMs are difficult to understand and may not be the best choice for a first-time home buyer.
- On certain ARMs, called negative amortization loans, borrowers can end up owing more money than they did at closing.
Fixed-rate mortgage
Advantages:
- Rates and payments remain constant, despite what happens in the broader economy.
- Offers stability which makes budgeting easier. People can manage their money with more certainty because their housing payments don’t change.
- Simple to understand, so they’re good for first-time buyers.
Disadvantages:
- To take advantage of lower rates, fixed-rate mortgage holders have to refinance.
- Can be too expensive for some borrowers because there is no early-on payment and rate break.
- ARMs can be customized for individual borrowers, while most fixed-rate mortgages can’t.
