Adjustable vs. Fixed Rate Mortgages

 

Adjustable vs. Fixed-Rate Mortgages

Whether you're a first-time or experienced homeowner, it's important to review mortgage options. To make you a more informed homebuyer, here is an explanation of fixed-rate and adjustable rate mortgages (ARM).

Fixed-Rate Mortgage Pros and Cons

A fixed-rate mortgage is the most common type of loan. With a fixed-rate mortgage, there won't be any variability which is attractive to buyers on a fixed income or with rigid budgets. However, this may not be the best option if interest rates are high at the time of purchase. Here are some of the benefits and drawbacks of a fixed-rate mortgage.

Pros:

• With a fixed-rate mortgage, the interest rate stays the same throughout the duration of the mortgage.
• Fixed-rate mortgage payments are always consistent regardless of what happens in the economy, making financial planning a simpler task.
• Fixed-rate mortgages are easy to understand, which is good for a first-time homebuyer who may not feel comfortable with an ARM.

Cons:

• Often has a higher initial cost than an ARM.
• If interest rates fall, a fixed-rate mortgage holder has to refinance to take advantage. This process typically involves thousands of dollars in closing costs, and time spent organizing documentation.

Adjustable-Rate Mortgage (ARM) Pros and Cons

An ARM is the opposite of a fixed-rate mortgage in that the interest rate fluctuates depending on the market. While their lower interest rate and payment makes them attractive to first-time homeowners, ARMs are typically more complex loans. Here are some of the advantages and disadvantages of an adjustable rate mortgage.

Pros:

• ARMs offer a lower initial interest rate and, thus, a lower payment amount.
• With an ARM, a borrower may qualify to buy more house than they otherwise would.
• A borrower can take advantage of falling interest rates without having to pay closing costs and fees all over again..
• An ARM provides the opportunity to invest and save more effectively. With a lower interest rate, a borrower could invest the money left over each month into a higher-yielding investment.
• For borrowers who do not plan on living in one house for very long, an ARM offers a more cost-effective mortgage solution that is more flexible than a fixed-rate mortgage.

Cons:

• Because of fluctuation, interest rates can increase significantly over the life of an adjusted-rate mortgage. If rates rise sharply, so will your mortgage payment.
• ARMs can be far more complex than fixed-rate mortgages as they rely on margins, caps, and adjustment indexes which can quickly get confusing.

Choosing the Right Mortgage for You

Buying a home is a big deal and one of the most important financial decisions you're likely to make. If you're unsure about what type of mortgage to choose, consider talking with an expert at Butler Mortgage.

For more than 25 years, Butler Mortgage has worked with all types of homeowners in Central Florida. Let us help you find the right loan solution for you by calling 407-931-3800 or by filling out our free consultation form online.