| When looking for a mortgage
to meet your needs, consider these key questions: Is
your income expected to increase in the coming years?
How long do you plan to live in your new home? And,
which mortgage will provide the lowest interest rate?
While 15 or 30 year fixed-rate mortgages are the most
popular, and Adjustable Rate Mortgage (ARM) offers some
interesting alternatives for home shoppers who plan
to move again within four or five years. Although interest
rates are the lowest they’ve been in 20 years,
an ARM provides even lower interest rates during its
introductory period. Below you will find information
about fixed rate mortgages and adjustable rate mortgages
so you choose the right home loan.
Fixed-Rate vs.
Adjustable Rate
Fixed-Rate Mortgage
Fixed-Rate Mortgage applies the same interest rate
toward monthly loan payments for the life of the loan.
Fixed-rate mortgages are more straightforward and easier
to understand than Adjustable Rate Mortgages (ARMs),
are more secure for the buyer, and are popular with
first-time home buyers. Since the risk to the lender
is higher, fixed-rate mortgages generally have higher
interest rates than ARMs.
For example, a lender can offer a 30-year fixed loan
to a home buyer at a 7.0% interest rate. The loan is
locked in to the 7.0% interest rate, even if the market
interest rate rises to 9.0%. Conversely, if the market
interest rate decreases to 5.5%, the borrower will continue
to pay the 7% interest rate.
Fixed-Rate benefits include:
Adjustable Rate Mortgage
An Adjustable Rate Mortgage (ARM) does not apply the
same interest rate toward monthly payments for the life
of the loan. Throughout the life of that loan, the home
buyer's principal and interest payment will adjust periodically
based on fluctuations in the interest rate.
For example, a lender could offer a 30-year ARM loan
to a home buyer at an initial 6.5% interest rate. During
an adjustment period for the ARM loan, the market interest
rate could rise to 8.0%, resulting in a significantly
larger interest payment. Similarly, the market interest
rate could decrease to 6.0%, resulting in lower interest
payments.
ARM benefits include:
- Initial payments lower due to lower beginning interest
rate, usually about 2% points below the fixed rate
- Ability to qualify for a higher loan amount due
to lower initial interest rates
- Lower interest payments if the interest rate drops
over time
- Interest rate caps limit the maximum interest payment
allowed for the loan
ARM considerations include:
Initial lower interest rate and monthly payments
are temporary and apply to the first adjustment period.
Typically, the interest rate will rise after the initial
adjustment period.
Higher interest payments if the interest rate rises
over time
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