One of the most important decisions you’ll make when getting a mortgage is whether to go with a fixed-rate or adjustable-rate mortgage (ARM). Before choosing, you need carefully evaluate your options and understand the differences between the two options since each has benefits and drawbacks.
Fixed-Rate Mortgages: The Basics
A fixed-rate mortgage is what it sounds like the interest rate on your mortgage will not change throughout the loan term. It implies that your monthly mortgage payment will remain the same, making it easier to manage your budget.
A fixed-rate mortgage’s key benefit is that it offers stability and predictability. You know precisely how much you’ll have to pay each month, which is very helpful if you’re on a strict spending plan or plan on staying in the property for a long time.
However, fixed-rate mortgages have certain drawbacks. For starters, the interest rate on a fixed-rate mortgage is higher than the starting interest rate on an ARM. As a result, your monthly payment will also increase, which may make it harder for you to qualify for a loan if your budget is limited.
Furthermore, if interest rates drop after you’ve taken out a fixed-rate mortgage, you won’t be able to take advantage of the lower rates without refinancing your mortgage, which may be time-consuming and costly.
Adjustable-Rate Mortgages: The Basics
An adjustable-rate mortgage (ARM) is a loan with a variable interest rate. For the first few years of the loan, the interest rate on an ARM is typically lower than the interest rate on a fixed-rate mortgage, making it an appealing alternative for some borrowers.
An ARM’s primary benefit is that it can help you save money in the short term, particularly if you plan on selling your house before the interest rate increases. Additionally, your monthly mortgage payment can decrease if interest rates drop after you’ve taken out an ARM.
However, there are also notable drawbacks to ARMs. First, the interest rate on an ARM might rise dramatically over time, making it harder to budget for your monthly mortgage payment. Additionally, if you plan to live in the property for a long time, there’s a chance that the interest rate will increase to the point where it makes your mortgage payments unaffordable.
Which Mortgage is Right for You?
Ultimately, your financial situation and goals can determine whether you need a fixed-rate or an adjustable-rate mortgage loan. A fixed-rate mortgage can be the best option if your top priorities are stability and predictability. However, an adjustable-rate mortgage may be the right choice if you’re open to taking more risk in exchange for potential short-term savings.
It’s also crucial to keep aware that there are hybrid mortgage alternatives that combine the security of a fixed-rate mortgage with the initially cheaper interest rate of an ARM. These mortgages can offer the best of both worlds but are not always available or the best option for everyone.
Whatever mortgage option you select, research and work with a reputable lender who can help guide you through the process and ensure you’re making the right decision for your financial needs.
