Fixed Rate Mortgages vs ARMs – Pros and Cons

When it comes to finding the best home mortgage for their needs and budget, most borrowers focus their attention on the interest rate. Understandable, since the interest rate can dramatically affect the affordability of a loan.

So when looking at home loans specifically, which type of interest rate should you get — fixed or adjustable? Both have their own set of pros and cons, and each option may work for some borrowers but not others.

Let’s take a look at the pros and cons of both fixed and adjustable mortgage rates below.

Fixed Rate Mortgages

Fixed rate mortgages have traditionally been the most common home financing option. Created after the Great Depression to help average working Americans afford a home, the 30 year fixed rate mortgage quickly became the norm.

Then there are the shorter term fixed rate mortgages. The 10, 15 and 20 year fixed rate mortgages also provide the benefits of having a stable interest rate, but with less time to pay the loan back, resulting in higher monthly payments.

No matter how long the term, a fixed rate mortgage provides certain benefits to the borrower.

Pros

• Predictable monthly payments due to interest rate never changing.
• One of the most accessible loan types to the average working American.
• Great option for buyers who plan to remain in their homes for several years.

Cons

• Equity slow to accumulate on longer term fixed rate mortgages.
• If interest rates fall, you’re “stuck” with a higher rate unless you refinance.
• Pay more in interest during the early years of homeownership.

Adjustable Rate Mortgages

When mortgage rates begin to trend a little higher, a lot of potential home buyers start to explore options beyond fixed rate financing. But are adjustable rate mortgages really a good idea for you and your home buying budget?

With most ARMs, the borrower is enticed by a significantly lower introductory interest rate. That low rate will normally stay in place without changing for the first 3, 5, or 7 years. After the introductory rate period expires, the rate will then be subject to change. With most standard (hybrid) ARMs, the interest rate is subject to adjustment annually.

For example, a 5/1 ARM is a 30 year loan that will have a low introductory rate for the first five years, then adjust once per year for the remaining 25 years. This arrangement can be attractive to some buyers, but it may not be the best option for everyone.

Pros

• Save money on interest during the early years of homeownership.
• Could be a great choice for investors who are buying a home to “flip,” or anyone who does not plan to live in the home for very many years.
• Can help borrowers get more affordable payments when interest rates are on the rise.

Cons

• Less predictable payments once the introductory rate period ends.
• Not a very good option for borrowers living on fixed income, or anyone who cannot afford the possibility of a higher payment in the future.
• Can end up costing more in the long run if rates continue to adjust higher throughout the life of the loan.

Where Can I Learn More?

Before deciding on any mortgage program, be sure to consider all of your options. Don’t be afraid to ask one of our professional loan experts to help you find mortgage options that are best suited for your needs. Give us a call today to explore fixed and adjustable-rate financing.