In your search for a home you’ve probably come across a couple of terms: “Fixed Rate Mortgage (FRM)” and “Adjustable Rate Mortgage (ARM).” What exactly are they, what’s the difference, and which one should you get? “Fixed” and “adjustable” both refer to the type of interest rate on your loan. There are advantages and disadvantages to both – read on to find out which one of them is right for you!
Fixed Rate Mortgage
The interest rate on a Fixed Rate Mortgage doesn’t change for the entire life of the loan, so your monthly mortgage payment will be the same from your first payment to your last. For example, if you get a 30 year Fixed Rate Mortgage with a 4% interest rate, your interest rate will stay at 4% for the entire 30 year loan term. There are several term lengths available for Fixed Rate Mortgages, the most popular being 15 and 30 Year Fixed Rate Mortgages. It’s worth noting that the longer the term on home mortgage, the more in collective interest you will pay over the life of the loan.
The main benefit of a Fixed Rate Mortgage is predictability, it makes monthly budgeting a breeze. It also provides protection against rising interest rates. No matter how much interest rates may change, your rate will remain the same. The main drawback is, in exchange for the security and predictability of a Fixed Rate Mortgage, interest rates are generally higher than interest rates for Adjustable Rate Mortgages. Keep in mind, as of today, interest rates are at historical record lows, even interest rates for Fixed Rate Mortgages.
Adjustable Rate Mortgage
Adjustable Rate Mortgages have an interest rate that changes periodically. Typically, there’s an initial interest rate that’s fixed for a period of time. After this initial fixed period, the interest rate may change, depending on market conditions. There are many types of ARMs, such as a 5/1 or 7/1 ARM in which the interest rate is fixed for 5 or 7 years, respectively, and then changes every year for the remainder of the loan term. Many Adjustable Rate Mortgages have limits on how much your rate can change. There are many variations on the structures of ARMs, so it’s important to compare products carefully before committing to anything.
Just like Fixed Rate Mortgages, ARMs have their ups and downs, no pun intended! The fixed period of an Adjustable Rate Mortgage typically has a lower interest rate than Fixed Rate Mortgages, but after the fixed period, your rate may increase, increasing your monthly payments. Of course, depending on the market, your rate could also decrease, resulting in lower monthly payments. Adjustable Rate Mortgages have more risk and less predictability, but with potential savings that may make the risk worth it.
Which One Should I Pick?
Most homeowners get Adjustable Rate Mortgages for the low initial payments, and usually refinance after the fixed period ends. If you’re planning on refinancing or moving after a few years, that low initial interest rate could save you a lot of money. However, if your plans for home ownership are longer term and you intend on staying in your home for a long time, the security and predictability of a Fixed Rate Mortgage may be more your speed. Discuss your goals and needs with a OneTrust Mortgage Strategist to pick which is right for you.
If you’re a visual learner, check out our YouTube channel for OneTrust’s quick overview of Fixed Vs ARM, as well as many other videos about the world of home loans!