If you’re planning to buy a home or refinance your current one, choosing between a fixed-rate mortgage and an adjustable-rate mortgage (ARM) is an important decision. Let’s consider the key differences between the two and which may serve you best.
Fixed-Rate Mortgages Explained
With a fixed-rate mortgage, the interest rate stays the same over the life of the loan. Your monthly payments for principal and interest do not change. That predictability can give you peace of mind and it’s a major reason most buyers choose this option.
Adjustable-Rate Mortgages Explained
With an adjustable-rate mortgage (ARM), the interest rate can change over time. That will change the monthly payment. Typically, ARMs offer lower initial fixed rates for the first five to ten years, making them more affordable at the start. However, after the initial fixed period ends, rates can go up. There is typically a cap on how high they can rise.
The Big Difference Between the Two
It’s stability versus risk. In exchange for a higher initial cost, a fixed-rate mortgage offers steady monthly payments. An ARM is riskier, starting with lower payments that could rise over time.
Factors to Consider When Choosing Between the Two
- Your Financial Situation. Is your income unpredictable? If so, the predictable monthly payments of a fixed-rate mortgage may work better for you. If your income is stable and you have cash reserves, you may be able to handle the increases of an ARM. Also, consider your future earnings. If you’re on track for income growth, the lower upfront costs of an ARM could be the smart way to go.
- Your Timeline. How long do you plan to stay in the house? If you’re thinking shorter-term commitment – say five to seven years – an ARM might make more sense. If you’re in it for the long haul, a fixed-rate mortgage may be the better fit.
- Market Conditions. Where are interest rates headed? If experts expect a rise, locking in a fixed-rate mortgage could deliver long-term savings. If rates are projected to fall, an ARM might offer more flexibility and short-term savings.
- Risk Tolerance. This is a personal factor: your comfort with uncertainty. If you’re more risk-tolerant, an ARM may suit you. But if the idea of changing payments makes you uneasy, the predictability of a fixed-rate mortgage is likely the better choice.
To discuss which option might be right for you, contact a member of the Decker Group at (972)591-3097 or connect with us online.
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