What's the Difference: Fixed Rate Mortgages vs. ARMs

Very few people today can purchase a home with savings alone. If you are like the vast majority of people, you will be borrowing money from a financial institution to purchase the home you want. Knowing whether to go with a fixed- or adjustable-rate mortgage (ARMs) can help guide you to the loan that is best for you.

Comparing ARMs and Fixed-Rate Mortgages

Two of the most common types of mortgages available are fixed-rate and adjustable-rate mortgages (ARMs). The main difference between ARMs and fixed-rate mortgages is how their interest rates are calculated.

Fixed-rate mortgages come with an interest rate that remains constant over the life of the loan. 30-year mortgages are the most common, but you may also choose a 20-year, 15-year, and even 10-year fixed-rate mortgage. In certain high-cost areas some mortgage lenders were even offering 40 year-loans. Though the mortgage interest rates tend to be higher than for other loan types, the rate is fixed and your payment won’t change. This stability makes them the most secure type of mortgage for buyers.

Adjustable-rate mortgages (ARMs) have a period of fixed interest, but after that the payment changes with whatever index the loan is based on. The period of fixed interest may be three, five, or seven years. With a 5/1 (the first number stands for the number of years in the initial fixed period, while the second indicates how often the new rate will adjust) ARM, for example, the initial interest rate remains fixed for the first five years, and then adjusts annually for the remaining term.

While ARMs are less secure than fixed-rate mortgages, they tend to have lower initial rates and therefore lower monthly payments. They can be a good option if money is tight in the early years, as long as you are confident you can meet future interest and payment increases.

Which is Best for You?

If you are looking for consistent mortgage payments that never change, fixed-rate mortgages may be the right choice. But if interest rates are low or even fall, a home buyer can possibly save money with an adjustable-rate mortgage.

Certainly there are benefits and drawbacks to each mortgage type. Long before you borrow, consider each option carefully to know which is most appropriate for your situation. With so much money at stake, making the best mortgage decision is important.

SDFCU offers many mortgage options including fixed and adjustable low rate loans. You can pre-qualify for home purchases through our online application and there is no application fee. Get started on your purchase or refinance today!

Topics:
Mortgage

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