Adjustable Rate Mortgage Vs. Fixed: Don't Make the Wrong Choice

By Craig Donofrio

Posted on September 15th, 2022

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Home loans have two main payment structures: adjustable rate mortgage and fixed rate mortgage.

Before you purchase a home, it’s important to understand how each mortgage option works and what the pros and cons of each are.

But if you're just looking for some quick advice: most traditional home buyers should get a fixed rate mortgage. You'll know exactly how much you're going each month, and you can always refinance in the future if rates drop.

If you're looking to sell in a few years, then an adjustable rate mortgage may make the most sense.

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Fixed-Rate Mortgage

The most popular type of mortgage is a conventional fixed-rate mortgage. The most common mortgage loan is a 30-year, fixed-rate mortgage

The fixed-rate mortgage's popularity comes from the fact that buyer’s payments stay the same throughout the payment period, so there’s no need to worry about future increases.

Other benefits of fixed-rate mortgages are easier to understand terms that don’t vary much from lender to lender, and the consistent payment structure protects homeowners from market swings that can cause significant increases.

Generally, fixed-rate mortgages are good for homeowners who plan to stay in their homes for at least five years. Fixed rate mortgages are also good for those who are on a strict budget each month and need consistency in their payments.

Buyers who plan to move less than seven years after they buy or those who are more comfortable with timing market fluctuations may be more well-suited for an adjustable rate mortgage.

Adjustable-Rate Mortgage (ARM)

This type of mortgage offers an introductory period - say five years - when the monthly payment is kept at a fixed rate. After the five years are up, the interest rate can fluctuate for the remaining time on the term.

Similar to credit card interest rates, the fluctuation is impacted by the current federal mortgage interest rates, and there is typically a cap to how much the rate can increase – which is stated in the loan terms.

Buyers have incentive to take out an adjustable-rate mortgage if rates are projected to go down by the end of the introductory period or if they plan to move at the end of their introductory period. This loan type is not as good of an option for buyers who aren’t confident in navigating more complex financial terms or for those who aren’t willing to gamble a bit with money or who don’t have the financial ability to accommodate increased payments.

If you’re in the market to buy, knowing what your payment options are and considering various types of loans can help you take advantage of market conditions and save lots of money. Be sure you consult with a lender to discuss your options so you can pick the best option to fit your budget and needs. A realtor can also give you some solid advice - if you want an ARM because you're looking to sell in the next few years, a good realtor will be able to show you a house in a neighborhood that will remain in-demand.

If you're looking to buy a home, our friends at Clever Real Estate can help. Clever offers a 100% free agent-matching service that can connect you with up to three or more local realtors who can guide you through your home purchase. And if you live in one of 41 states that allows for buyer rebates, you'll get 0.5% cash back on home sales above $150,000. On a $400,000 home, that's a $2,000 check hand delivered right to your mailbox after closing.

Want to learn more? Fill out the form below and get started on your home-buying journey today!

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Posted in Buying a House, Mortgage