Fixed Rate or Adjustable: Which is Better?

When you first begin looking at home loans, an adjustable rate mortgage (ARM) can be very appealing since the monthly payments will likely be lower. This is due to introductory rates that start low but “adjust” to higher rates at a set interval. It is important that buyers be aware of the difficulties that these types of mortgages present.

Fixed rate mortgages on the other hand tend to have higher monthly payments attached to them but since rates are fixed, you can reduce the risks presented by fluctuating economic environments.

Below you fill some of the Benefits and Disadvantages of both Fixed Rate and Adjustable Rate mortgages to better help you understand which one may be right for you.

Adjustable Rate Mortgages

Benefits

The initial interest rates are lower. These types of loans allow lenders to have lower payment requirements when qualifying new borrowers. As a result, buyers are able to buy larger homes than they normally would be able to.
No refinancing is required to benefit from falling interest rates. Because your rate will adjust with the current market, you automatically benefit. This also allows you to save on closing costs and other related fees.
You can take the money you save on an ARM and invest it in something that pays a higher interest than home appreciation rates.
Lets borrows who do not plan to stay in the house for long to buy a home at a reduced cost.

Disadvantages

Your rates can increase by a large amount over the lifetime of the loan repayment. A 3% ARM can end up at 8% in just a year or two if rates increase.
The first rate adjustment can catch you off guard because caps, which usually limit the increase amount, may not apply to your first adjustment.
These types of mortgages can be confusing and a certain level of sophistication is needed to understand them. This can allow unscrupulous brokers to take advantage of you.
With a Negative Amortization loan, you can end up owing more money to the bank than your home is worth. This is due to the fact that payments on these loans are usually “interest only” meaning the principal never goes down.

Fixed Rate Mortgages

Benefits

Your payments and your interest rate will remain the same. Even if inflation were to take hold and the costs of borrowing money increased, you would be unaffected.
Easier to budget for. Knowing that your house payment won’t change can help you be more accurate with your financial planning.
Easy to understand. Unlike ARMs, it is easier for most people to understand the concepts behind fixed interest rate home loans.

Disadvantages

In order to benefit from falling mortgage rates you have to refinance. This can cost thousands of dollars in fees and closing costs.
Can price you out of a home. Because payments and qualification requirements are higher, you may not be able to afford the payment or get a loan.
Are generally not customizable like an ARM loan. Every lender will have similar terms.

Questions to Ask Before Deciding

How Long Will I be Living in the Home? The shorter the period, the more an ARM loan becomes
How Frequently Will My ARM Adjust? Some adjust yearly, some monthly. It is imperative that you know in advance.
What is The Current Interest Rate Environment? With high rates, ARMs are more appealing. Lower Rates and a Fixed Rate is probably a better choice.
If Rates Rise, Can You Still Afford the Payment?