The Difference Between Fixed and Adjustable Rate Mortgages
Which loan is the right mortgage for you?
Struggling with the decision between a fixed and an adjustable rate mortgage? You’re not alone. Nearly every borrower struggles with this same question.
The simple answer is to consult a professional mortgage banker at Loan One, a division of The Union Bank Company, to help you better understand your options and decide the best course of action for you. But, if you want to figure things out on your own, there are some basic guidelines that can help.
What Is A Fixed-Rate Mortgage
- A fixed-rate loan is good for locking in a low interest rate. While your property taxes and homeowner’s insurance premiums may change, your principal and interest (in other words, your monthly payment) will remain stable for the life of the loan. Early on, most of your payment is applied to the interest and very little to the principal. Over time this trend reverses.
- If you plan to live in your home for more than 10 years – or if you simply want to minimize risk – a fixed-rate loan might be your best option.
What Is An Adjustable Rate Mortgage
- Adjustable-Rate Mortgages (“ARMs”) tend to offer lower rates at the beginning of the loan – typically a few months up to 10 years. For this reason, ARMs can be an attractive option for borrowers who anticipate moving in three to five years.
- An ARM will guarantee an introductory rate that is typically lower than that of a fixed rate mortgage for a set period of time. After this time, the rate will “unlock” and adjust periodically to an outside index.
- “5/1” is a common type of ARM. Citing our example, the borrower will pay a a lower fixed interest rate for the first five years (the “5” in 5/1). In year six, the rate will adjust once a year (the “1” in 5/1) for the remaining life of the loan.
- Many different types of ARMs are available – some adjust once a year and others every six months. Most have “caps” that ensure your monthly payment will not increase too much.
- The actual amount of your monthly payment may be capped. Meanwhile, a “lifetime cap” represents the maximum interest rate your loan may reach but never exceed under any circumstance.
So which loan option is right for you?
Choosing between a fixed rate mortgage and an adjustable rate mortgage (ARM) comes down to many factors including your personal goals and risk tolerance, as well as current market conditions.
Contact Loan One today to speak with a mortgage banker about the best choice for you.
What would your fixed-rate or ARM payments be?