There are a variety of loans available when purchasing a home. Deciding which option is the best for you can seem overwhelming at times. Not to worry! Our team of Loan Officers are here to help. Today we’re identifying the key differences between a fixed-rate vs. an adjustable-rate mortgage.
According to Investopedia, a fixed-rate mortgage charges a set interest rate that remains unchanged throughout the life of the loan. Additionally, it’s important to note the amount of principal and interest paid each month varies, while the total payment remains the same.
Adjustable-Rate Mortgage (ARM)
An ARM can be characterized by interest rates that automatically adjust or fluctuate according to certain market indexes. Generally, an ARM begins with an introductory or initial interest rate, which then may rise or fall. Monthly payments may or may not exceed the loan cap.
Key Differences Between a Fixed-Rate vs. an Adjustable-Rate Mortgage
According to the Consumer Financial Protection Bureau, typically, ARMs will start at a lower interest rate than fixed rate mortgages. Although the initial rate may stay the same during the introductory period, your interest rate will change, and the amount of your payment is likely to go up over time. Since part of your interest rate is tied to an index, your payment will fluctuate when the index of interest increases or decreases.
A fixed-rate mortgage is a great option for someone who plans on staying in their home long term. It will ensure that the monthly mortgage payment is consistent, so you can budget accordingly. Furthermore, after a few years, a homeowner with a fixed-rate mortgage could consider refinance options. Read more about the refinance process i
on our blog, “Questions to Ask Your Lender Before You Refinance.”
According to NerdWallet, Adjustable-Rate-Mortgages are often appealing to first-time-home buyers because lower rates boost buying power. Additionally, an ARM offers more flexibility for those who may want to move in a couple of years, or for those who want
s to keep their long-term options open. Although there is more risk associated, if interest rates fall there is the possibility to save a lot of money on your monthly mortgage payments!
Thinking about buying a home? Download the DMLapp to play around on your loan options with our loan calculator. With the calculator, you can easily calculate payments and determine costs associated with a new home purchase with a fixed-rate, or ARM.