Adjustable vs Fixed Rate Mortgages

Home buyers typically have two choices when securing a new mortgage, either a fixed rate mortgage or an adjustable rate mortgage. A fixed rate mortgage, typically secured for a period of 15 or 30 years, locks in an interest rate over the term of the loan. The loan repayment schedule is predictable, with principal and interest clearly defined, and set over the life of the loan.

On the other hand, an adjustable rate mortgage, more commonly referred to as an ARM, offers a fixed interest rate for an initial period of time, after which the interest rate can be reset and vary over the life of the loan. After the initial period of time with a set rate, the interest rate on an ARM is typically tied to an economic indicator, usually the interest rate set by the fed. The initial interest rate of an ARM is typically lower than what can be secured through a fixed rate loan. In most instances, ARMs have set rates for 2, 3 or 5 years. At the end of that period, interest rates are variable, and can be reset, typically once a year.

Important Questions to Consider

When evaluating which type of loan is the better choice for a homebuyer, people have strong opinions on both sides of the argument. Before deciding on which loan is best for your individual situation, it is important to take a look at the simple arithmetic and make the following assessments:

• What can you afford to pay now?
• How will your income change in the next year? The next three years?
• Do experts expect interest rates to increase or decrease or stay the same in the foreseeable future?
• How long do you expect to be in your home? If you will only be in your home for 3 to 5 years, the lower initial interest rate of an ARM can be very attractive.

Adjustable Rate Mortgages (ARM)

Some people view an ARM as a helping hand to realize their dream of owning a home. An ARM can be a great solution for someone with a short term cash flow problem for those just starting in their career or establishing credit. They are in a position where they fully expect their income to increase in the coming years, at which time they can withstand increases in their house payment, or will be able to refinance their ARM and secure a fixed rate mortgage.
The good news on adjustable rate mortgages is that the federal interest rate is at historical lows, making the initial interest rate on these mortgages extremely attractive and competitive. These low payments make home ownership more affordable for a larger number of people. Coupled with house prices at historically low rates, home ownership has not been more affordable in this country for quite some time.

Certainty Offered by Fixed Rate Loans

Other people prefer less uncertainty in their lives and like the predictability of a fixed rate loan. Our website offers a mortgage calculator that allows you to easily run through the different calculations. These financial calculations can be helpful in guiding you through the decision making process and finding the solution best for your family.

Home Lender Depot Can Help

The mortgage professionals at Home Lender Depot can assist in guiding you through the decision making process, so you secure a loan that is right for you today, and well positioned to fit your financial goals for the foreseeable future. Call 800-470-0099 or apply online to get started right away.