Which Is Right For Me: Adjustable Or Fixed-Rate Mortgage Loan?

For the Home

The choice of which mortgage loan to go with starts with a simple question: fixed-rate or adjustable? There are many different terms, points, and rates associated with each, but narrowing your search to a category simplifies the process.

Fixed-rate mortgages are the more traditional choice. You and a lender agree to a length of time (or term) and an interest rate. That interest rate stays the same throughout the duration of the mortgage.

Adjustable Rate Mortgages (ARMs) are a slightly newer offering. These loans have a segment of time during which the interest rate is fixed. After that, the rate is determined by an economic indicator.

So, which is the right one for you? The answer depends on several factors.

How long do you plan to own your home?

One thing you’ll notice right away when shopping for mortgages is that ARMs have lower interest rates, sometimes by as much as 0.50%. On a $200,000 mortgage, that saves you as much as $70 a month! The initial rates are lower because the lender is taking on less risk.

With a traditional mortgage, if rates go up, the lender is stuck with a lower return. With the ARM, you agree to pay more as the lending market offers more. If you intend to buy the house, make some improvements and resell it for a profit, the ARM will lower your costs while you’re living there.

There’s still risk involved in the ARM even if you plan to sell the house.

If demand drops in your neighborhood, you may have trouble finding a buyer.

If you can find a buyer, but not for the price you paid for the house, the difference between the sale price and what you owe will follow you around. It is draining your monthly income until you finally get it paid off.

On the other hand, if you’re in your house for the long haul, the savings are likely to get wiped out once the adjustment period starts.

How much can you afford to put down?

An ARM can be easier to qualify for and provides you with an interest rate that you might not get without a 20% down payment. If you don’t have enough cash on hand to make a sizeable down payment, an ARM might give you some time to build equity.

Refinancing your mortgage after the initial period is over can put you in a better position. Use the equity you have in your home, plus whatever you’ve saved during that time, to put more money down and get a better fixed-rate mortgage.

Of course, this strategy is not without risk either. If the value of your home decreases, you may have a difficult time refinancing for the balance of the loan after the initial term.  This would leave you stuck paying the higher interest rates of the ARM. If you can’t make the payments, you still lose your house, regardless of the equity you’ve established.

If you’ve got the cash to make a 20% down payment or are buying in an up-and-down housing market, a fixed-rate mortgage provides a reasonable rate. Your mortgage payment stays the same from month-to-month, and there’s no uncertainty about what global economies do in the interim.

What’s your risk tolerance?

At the core of the choice between fixed-rate and adjustable-rate mortgages, is a quick and dirty shortcut. Fixed-rate mortgages are the safer, more conservative choice.

Adjustable-rate mortgages are the riskier alternative but offer the possibility of savings if:

  • You have the room in your budget to accommodate a potentially fluctuating mortgage payment. You also have enough security in your work, savings, and other financial priorities.  An ARM does offer the potential to lower your monthly payment.
  • You’re confident that the value of your home will increase faster than interest rates.

The stability of a fixed-rate mortgage may be desirable if you’ve found the house you want to raise a family in. The simplicity of the fixed-rate mortgage is also very appealing. It might be easier to be financially aggressive in other aspects of your life and not put the place where you live at risk.







13 Comments on “Which Is Right For Me: Adjustable Or Fixed-Rate Mortgage Loan?”

  1. My wife and I have been looking at our options when it comes to interest for our home loans, and I think that a fixed rate would be best for us after reading your article. I like that you talked about being able to have a fixed interest home loan and that it is able to stay the same throughout the agreed length of the mortgage. I’ll have to talk to my wife and see what she wants, but I’m thinking that fixed interest home loans are the best option for us right now! Thanks for the info!

  2. This article was really helpful for me and my husband since we have been thinking about buying a new home but we aren’t sure which mortgage option is best for us. You mention looking at how long you plan on living in the home or at least how long you plan on owning it. I had no idea that you should look into the interest rates that go with it and that there is always going to be a risk in buying a home. Thanks for the help.

  3. My husband and I are going to buy a new home and we have no idea what kind of mortgage we need. I’m glad you talked about how there are two different types and what it means for both types. It was really helpful. I’m glad to hear that with a traditional mortgage that if the rate goes up, then the lender is stuck with a lower return. That’s good to know! Thanks!

    1. Hi Deb, we’re happy to help! Best of luck with the house hunting. We’re here if you need us!

  4. I appreciate the information on ARM’s and how they can save you money when done right. In my line of work, where we live is often up in the air and we sometimes have to move on a moments notice. I will remember this when we look for our new home.

  5. Very good article and explained clearly what each mortgage has to offer, this guide would definitely help out those who are still confused. Anyone new to the process should educate themselves and this resource is very good! Do you want stability or is that not a super important factor to you, these are just one of the questions we’ll have to ask ourselves when thinking about this.

  6. That’s good to know that if you’re confident your home value will increase faster than interest rates then an adjustable-rate mortgage would be possible. My husband and I are looking to buy our first home this winter so we’re trying to figure out all the financial parts of it. We’ll have to look into the different rates and ask a realtor if our house value will go up since we wouldn’t want to risk having really high rates later.

  7. I was very interested in your post about a fixed rate mortgage. I wasn’t sure what it was at first, but now I know! I was surprised that it is more traditional compared to adjustable rate mortgages. A fixed rate mortgage would be best for my family and me because we plan on staying in our home for a long time. Thanks for your help!

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