Adjustable Rate Mortgage (ARM) vs a Fixed-Rate mortgage. Which loan should you choose?

As the old adage goes, “one size does not fit all.”  The mortgage industry perfectly exemplifies this saying.  When shopping for a mortgage, there are myriad of options including Fixed-Rate, ARM, Balloon; Conventional or Government; Purchasing, Construction, or Refinancing.

If you have been shopping for mortgages, you have probably pondered the question of which loan is best for you.  In this article, we tackle the question of an ARM vs fixed-rate mortgage to help you navigate some of your options.

Adjustable Rate Mortgage (ARM)

An adjustable-rate mortgage is a home loan that has an interest rate that can change once a year after the initial introductory fixed-rate period expires.  As an example, a 5/1 ARM will maintain the same interest rate for the first five years, after which the rate will be adjusted once per year.  The payments will move up or down based on the index used to calculate the interest rates.

Why choose an ARM?

There are several reasons borrowers choose an ARM when financing a home.

• During the adjustable years of an ARM, if mortgage rates are falling, borrowers can take advantage of those rates without having to refinance.
• Typically the initial period of the loan will offer lower interest rates than fixed-rate loans. As a result, many buyers may qualify for more expensive homes than they would under the fixed-rate loans as their lenders can factor in lower payments at the onset of the loan.
• Buyers who do not plan to live in the home for a long time might find that the ARM will fit perfectly with their home purchasing plan. In these cases, the borrowers anticipate that they will move before the initial fixed-rate period of the loan expires and the adjustable period kicks in.

Reasons some borrowers decide against an ARM as a financing option.

• Once the initial introductory rate expires, a borrower may face payments and rates that can increase significantly during the term of the loan.  For many, these increases can put a strain on a budget.
• Some loans do not provide a cap to the potential increases which in turn can create a significant increase at the first adjustment.
• Many borrowers find ARMs confusing and difficult to understand the ins and outs of the terms.

ARMS are often offered as 3/1, 5/1, 7/1, and 10/1.  Your loan officer can offer guidance regarding the various ARM options available for your choice.

Fixed Rate Mortgage

As the name suggests, a fixed rate mortgage’s distinct characteristic is that its interest remains the same throughout the life of the loan.  With this type of loan, your interest rates and principal and interest payments will not change.  The only variable factors in this type of loan will be our property tax and insurance payments.

Most borrowers find the fixed rate loan appealing at it provides predictability for budgeting purposes

Why choose a fixed-rate loan?

• Borrowers can rest-assured that the rates and payments for their loans remain constant despite changes in the overall economy.  This type of loan is not subject to upticks (nor downticks) in the prime lending rates nor other economic variables.
• The knowledge of specific monthly payments provides more stability for borrowers when managing their budgets.
• Ease of understanding.  A fixed-rate loan is far less complicated to comprehend than the terms of an ARM. Thus many borrowers find they are more comfortable with this lending option.

The downside of a fixed-rate mortgage

• One of the biggest disadvantages of a fixed-rate mortgage is that if interest rates fall, the borrowers have to refinance their loan to take advantage of lower interest rates.  Refinancing a loan will require certain loan fees and costs to be incurred again.
• Some borrowers may find it more difficult to qualify for a fixed rate loan as their payments and mortgage rates will be higher than with an ARM.
• Offer a cheaper way for borrowers who don’t plan on living in one place for very long to buy a house.

Talk to your loan officer about these options when financing your home. Your loan officer can provide the insight you need to determine which of the many loan options are best suited to your unique needs.

We, at First Home Mortgage, specialize in these and other loan options and can help you navigate the process to secure the loan you need to acquire the home of your dreams.

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