One of the bigger decisions you'll need to make when obtaining a new home mortgage is whether to go with a fixed-rate mortgage or an adjustable-rate mortgage. By definition, a fixed-rate mortgage is a loan with an interest rate that is fixed for the entire loan term. In contrast, an adjustable-rate mortgage, or ARM, is a loan with an interest rate that becomes adjustable after the initial fixed period. ARMs typically have lower initial rates than a fixed rate mortgage. The lower initial rate of adjustable-rate mortgages can be very attractive to borrowers, yet they carry a degree of uncertainty. Fixed-rate mortgages, on the other hand, offer rate and payment security, but they can be more expensive. Here are some pros and cons of ARMs and fixed-rate mortgages.
All of these things should factor into your decision between a fixed-rate mortgage and an adjustable. Here are some important questions to answer when deciding which loan is better for you:
1. How long do you plan on staying in the home?
If you plan on owning the house only a few years, it may make sense to take the lower-rate ARM. Your payment and rate will be lower, and you can build up savings for a bigger home down the road. Plus, you'll never be exposed to rate adjustments because you'll be selling the home before the adjustable rate period begins.
2. How frequently does the ARM adjust, and when is the adjustment made?
Make sure you speak with us and understand the terms of the ARM. After the initial fixed period, most ARMs adjust every year on the anniversary of the mortgage. The new rate is actually set about 45 days before the anniversary, based on the specified index. If that's too much volatility for you, a fixed rate mortgage may be the better option.
3. What's the interest rate environment like?
When rates are relatively high, ARMs can make sense because of their lower rate and payment. The objective would be to refinance when rates come back down. When rates are relatively low, securing a fixed-rate mortgage can make more sense.
There are several factors to consider when choosing between a fixed-rate or adjustable-rate mortgage. Please don't hesitate to contact us with any questions or if you’d like help in determining which loan is right for you.
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-The Kavanewsky Team