Homeownership is a tremendous achievement! However, as exciting as this milestone is, one decision looms large: selecting a mortgage to suit your needs. Among the choices available, adjustable and fixed-rate mortgages stand as pillars in the mortgage landscape. Not sure which is right for you? Join us in exploring the intricacies of adjustable vs fixed-rate mortgages so you can make a well-informed decision.
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Key Differences Between Adjustable vs Fixed-Rate Mortgages
What is an Adjustable-Rate Mortgage (ARM)?
An adjustable-rate mortgage, or ARM, is a mortgage with an interest rate that adjusts periodically, usually every one to five years. The initial fixed-rate period can vary from one month to 10 years, depending on the terms of the loan. During this time, the interest rate remains the same, but after the initial period, the rate can adjust—up or down—based on market conditions.
The benefit of an adjustable vs fixed-rate mortgage is that adjustable-rate mortgages typically have lower initial interest rates than fixed-rate mortgages. In the first few years of the loan, the monthly mortgage payment is lower, which can make homeownership more affordable. However, when the interest rate adjusts, so does the monthly payment. This means the monthly payment could increase if the interest rate goes up, causing homeowners to pay more overtime.
What is a Fixed-Rate Mortgage (FRM)?
A fixed-rate mortgage, or FRM, is a mortgage that has a fixed interest rate for the entire term of the loan, usually 15 or 30 years. The benefit of a FRM is the interest rate is locked in for the duration of the loan, which creates stability and predictability for homeowners. This means homeowners can budget accordingly and not worry about their monthly payment changing over time.
The downside to a FRM is that the initial interest rate is usually higher than an ARM, which means the monthly payment will be higher. However, over time, if interest rates rise, homeowners with an FRM are protected from any increase in their mortgage payment. That said, if interest rates go down in the future, you won’t be able to take advantage of them unless you refinance your mortgage.
When considering adjustable vs fixed-rate mortgages, think about how you’ll be impacted both short and long-term.
Factors to Consider When Choosing Between Adjustable vs Fixed-Rate Mortgages
There are several factors to consider when choosing between adjustable and fixed-rate mortgages. One of the most important factors is your financial situation, including your income, debts, and credit score. Assessing your risk tolerance and future goals is also important. If you plan on owning your home for a long time, an FRM may be the best option. However, if you plan on moving in a few years, an ARM may be more suitable.
To determine which option is best for you, it’s important to evaluate your situation and goals. Consider how much you can afford to pay each month, how long you plan on living in your home, and whether you’re prepared for the possibility of a higher monthly payment. While both types of mortgages have their pros and cons, ultimately the decision between an ARM and FRM will depend on your individual situation.
Adjustable or Fixed-Rate Mortgages? Millennial Title is Here to Help
When choosing between an adjustable and fixed-rate mortgage, it’s important to weigh the benefits and drawbacks of each based on your financial situation and goals. An ARM may be a good option for those who need a lower initial monthly payment, but are willing to accept the potential risks of a fluctuating interest rate. On the other hand, an FRM may be a better option for those who value stability and predictability in their monthly payments. Regardless of which type of mortgage you choose, make sure you have a team you can trust to support you.
When you choose Millennial Title, our staff is here to handle the closing of your new loan. We take care of everything: from ensuring the prior mortgage is paid-in-full and released to making sure the new mortgage is properly recorded. With our expertise and attention to detail, you can have peace of mind knowing the closing process will be stress-free and efficient. We are here to support you every step of the way, making your journey an easy and rewarding experience.
Looking for more valuable information? Learn the steps to ensuring a successful home appraisal—which results in a lower interest rate for your mortgage—with our useful checklist!
