How Do Fixed- & Adjustable-Rate Mortgages Compare?

Mortgages come in all different shapes and sizes with different terms, conditions, benefits, and more. Here we compare fixed- and adjustable-rate mortgages and the pros and cons for each.

When you’re looking to buy a home, it’s important to understand your options to ensure you’re getting the best loan for you. One of the main decisions you’ll need to make is whether to get a fixed or adjustable-rate mortgage.

Interest Rate Structures

Fixed-Rate Mortgage

A fixed-rate mortgage is a mortgage with an interest rate that stays the same for the entire term of the loan – meaning the monthly principal and interest payment won’t change.

If you plan to stay in your home for a longer period of time, a fixed mortgage payment may provide better stability and security for your budget.

Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage is a loan type that offers a lower initial interest rate than most fixed-rate loans. The tradeoff is that the interest rate can change periodically and the monthly payment will go up or down accordingly.

For example, with a 10/10 ARM, the initial interest rate is fixed for ten years and then it’s adjusted every 10 years for the life of the loan.

ARMs can be a good option when mortgage rates are rising and when you don’t plan to stay in your home for longer than the initial fixed-rate term. However, you assume more risk over the long-term as rates may go up or down.

Fixed- Or Adjustable-Rate?

Not sure which is right for you? Ask yourself these questions:

• How long do you plan to stay in the home?
• Do you expect your income to rise over time to cover a potential increase in payment?
• What other financial obligations do you expect to have over the term or your mortgage?
• What are mortgage rates predicted to do in the next five to ten years?

Summary

Now that you have a good understanding of the two main mortgage characteristics, know that there are different types of mortgages to choose from – including conventional, government-backed, and jumbo loans. When deciding on a mortgage type, it’s essential to assess factors like your financial situation, future plans, risk tolerance, and how long you intend to stay in the home. Work with your lender and request loan comparisons to help determine which mortgage loan and rate structure will work best for you.