If you’re shopping for a mortgage, you’ll probably come across a fixed-rate and adjustable-rate mortgage option. It can seem confusing, but they both have their pros and cons and are right for different borrowers.
Here we break down the two options and how they work to best help you decide.
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage has the same interest rate for the life of the loan. Once you lock your rate in with an EPM loan officer, you have that rate for the entire term unless you sell the home or refinance.
Pros and Cons of the Fixed-Rate Mortgage
All mortgage programs have pros and cons. Here’s what to consider about the fixed-rate mortgage.
- Your payment (principal and interest) never changes
- It’s easier to budget for your payments for the long-term
- You pay a part of your principal balance each month
- You don’t have to worry when interest rates increase
- Your interest rate may be higher than the initial ARM rate
- You can’t take advantage of rates if they fall unless you refinance
- You pay the principal off slower than with an ARM
What is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage has a fixed rate for a short period called the introductory period. After the introductory period ends, the rate adjusts on the same date each year, either up or down.
Adjustable interest rates are based on an index and margin. The index could be something like LIBOR or the prime rate. A margin is a preset number we add to the index to come up with your interest rate.
Each ARM loan has cap rates or the maximum amount a rate can change in a year and over its lifetime, so you’ll always know the ‘worst-case scenario.’
Pros and Cons of the Adjustable-Rate Mortgage
Adjustable-rate loans have a bad reputation, but there are many good things about them and some downsides you should understand.
- The introductory period interest rate is often lower than a fixed interest rate
- It’s great for people with short-term plans (moving soon) since you can take advantage of the lower rate and not worry about the rate adjusting if you move
- Your payments can fall if rates decrease
- You’ll know ahead of time the worst-case scenario for a period change and lifetime change
- Your payment could increase if rates go up significantly
- ARM loans can be hard to understand
- It’s harder to budget with a changing payment
If you’re in the market for a mortgage, let EPM help you decide which is right for you. A fixed-rate mortgage or ARM is a big decision, and they aren’t a one-size-fits-all approach. We’ll discuss your financial goals, what you can afford, and what you can handle before helping you decide.
We’ll show you both options side-by-side so you can see the big picture and decide which is right for you – a fixed-rate or adjustable-rate mortgage.