Fixed-rate vs adjustable rate mortgages: which is right for you?

The journey of homeownership begins with understanding the type of mortgage that fits your financial circumstances and long-term goals. Two primary options stand out: Fixed-Rate Mortgages and Adjustable Rate Mortgages (ARM). In this guide, we delve deeper into the characteristics, advantages, disadvantages, and ideal scenarios for both, to help you make an informed decision.

Understanding Fixed-rate Mortgages

Fixed-rate mortgages are loans with an interest rate that remains the same for the entire term of the loan. The major advantage is predictability – your monthly payments remain constant over the duration of the loan, allowing for effective long-term financial planning.

For instance, if you're planning to stay in a house for 30 years and want to avoid the financial uncertainty associated with fluctuating market interest rates, a fixed-rate mortgage would be an ideal choice.

Understanding Adjustable Rate Mortgages (ARM)

Adjustable Rate Mortgages, on the other hand, have interest rates that change over time based on market conditions. The initial rate is often lower than the market rate, making it an attractive option for some homebuyers, and then after a period of 5,7, or 10 years, will adjust based on market conditions.

If you're planning to stay in a house for a few years and can absorb potential future rate increases, an ARM could provide cost savings and flexibility.

Direct Comparison: ARM vs Fixed-rate Mortgages

A direct comparison shows that while ARMs can be cheaper initially, they can become more expensive if rates increase.

Choosing an ARM could be advantageous for those planning to sell before the rate adjusts or those who anticipate a higher income in the future. Conversely, a fixed-rate mortgage offers stability and is ideal for those planning to stay in their home for a longer term.

Key factors to consider when choosing between ARM and fixed-rate mortgages

When making your choice, consider:

1. Your Homeownership Timeline: If you're planning to sell before the rate adjusts, an ARM may be the best choice. For longer-term homeownership, consider a fixed-rate mortgage.
2. Financial Stability: If your income is stable and predictable, you may feel more comfortable with a fixed-rate mortgage. An ARM may work for those expecting an income increase.
3. Market Predictions: If you anticipate a decrease in market rates, an ARM could be beneficial.
4. Risk Tolerance: An ARM requires a certain degree of risk tolerance due to rate variability.
5. Real-Life Scenarios: ARM vs Fixed-rate Mortgages

Let's look at two examples:

1. Scenario A (ARM advantage): John plans to sell his house in 5 years. He opts for an ARM, saving money compared to a fixed-rate mortgage.

2. Scenario B (Fixed-rate advantage): Sarah plans to live in her house for 20 years. She opts for a fixed-rate mortgage. Let's say market rates rise significantly after 5 years. Sarah's total repayment would be around $515,609, compared to a potentially higher repayment with an ARM if rates increase.

Choosing between a fixed-rate and an adjustable-rate mortgage is not merely a numbers game. It requires an understanding of your future plans, financial stability, and risk tolerance. The goal is to align your mortgage choice with your long-term financial goals.

Ready to take the next step in your homeownership journey? Check out our current rates and schedule a call with a loan consultant to explore the best loan program for your financial goals.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.