Adjustable-Rate vs. Fixed-Rate Mortgage
Should I get a Fixed Mortgage or an Adjustable Rate?
Who's the winner in ARM vs fixed Rate Mortgages? Which one is better- an adjustable mortgage or a fixed-rate loan. There are advantages and disadvantages to both. Adjustable-rate mortgages (ARMs), for instance, offer a low cost initially, but they can be a bit uncertain. Fixed-rate mortgages are more secure, but they can also be more expensive.
Advantages of ARMs
When ARM vs fixed rate mortgage is debated upon, you can clearly judge both of them by understanding and weighing down their advantages.
- Adjustable rate mortgages (ARMs) feature lower rates and lower payments early in the term.
- Borrowers can take advantage of lowering rates without having to refinance and incur closing costs and other fees.
- Borrowers who aren't planning on remaining in the home for very long have a relatively inexpensive way of buying a home.
- Because initial payments are lower, borrowers can purchase larger homes than they would otherwise be able to afford.
Disadvantages of ARMS
- Over the term of the adjustable rate mortgage loan, rates and payments can increase substantially. If the rates rise sharply, a borrower could see an increase of as much as five percentage points over the course of three years.
- The first adjustment can be high - some annual caps don't apply to the first change.
- On some ARMS, known as negative amortization loans, a borrower can end up owing more money than they actually did at closing. That's because the payments are so low that they cover only part of the interest that's due, and anything more gets rolled into the principal.
- Adjustable rate mortgages aren't easy to understand. Because they're so much more flexible than fixed-rate mortgages, the complexities of things like adjustment indexes, caps, margins and so on can be confusing to unsophisticated borrowers.
Advantages of Fixed-Rate Mortgages
- For fixed-rate mortgages, here are no surprises. Rates and payments don't change, so even if mortgage rates skyrocket, the borrower's payments don't.
- They're considerably easier to understand than adjustable rate mortgages
- People can budget and manage money more easily, knowing that their housing costs aren't going to change.
Disadvantages of Fixed Rate Mortgages
- If the rates go down, in order to benefit, the borrower has to refinance. That means a lot of paperwork and around $4,000 in closing costs.
- There is little opportunity for customization in fixed rate mortgages.
- Because there is no early-on payment and rate break, fixed-rate mortgages can be prohibitively expensive for some borrowers.
Which is better?
- How Long Will You Remain in the Home?
If you're only planning on occupying the home for a few years, you'd be better off with an adjustable rate mortgage. Your payment and rate will be lower, and you'll be able to save up for your next home. Also, you'll never experience a huge rate adjustment, because you'll be moving before the adjustable period takes effect.
- How Often, and When, Does the ARM Adjust?
After the fixed period, ARMS generally adjust annually, on the mortgage's anniversary. The rate is set 45 days prior, based on the index specified. However, some ARMS adjust monthly, and some borrowers find that to be just a little too much volatility for their liking.
- What are the Interest Rates?
When the rates are high adjustable rate mortgages make sense because of the lower initial rates rather than fixed rate mortgages. Rates could fall, and borrowers could end up with a good rate without having to refinance. When rates are low, though, it makes sense to go with a fixed-rate mortgages rather than ARMs, especially if your mortgage is over a 30-year term.
Also, ask yourself if the rates skyrocketed, and you weren't locked in, would you still be able to remain in your home? If your financial situation is such that you frequently feel a bit of a pinch, an adjustable rate mortgage loan may not be for you. So it is up to you to decide the best between ARM vs fixed rate mortgages.