Should I Get a Fixed-Rate Mortgage or an Adjustable-Rate-Mortgage?

Q: Should I get a fixed-rate mortgage or an adjustable-rate mortgage?

A: Two common types of mortgages are fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs). Let’s explore the differences between the two so you can make an informed decision.

What is a fixed-rate mortgage?

An FRM is a mortgage in which the interest rate remains constant throughout the life of the loan, irrespective of market rate fluctuations. FRMs are usually available in 15- and 30-year terms, though 10- and 20-year terms are also fairly common.

FRMs are suitable for borrowers who plan to stay in their homes for a long time and want to avoid the risk of rising interest rates.

What are the pros and cons of fixed-rate mortgages? 

FRMs have several advantages, including: 

• Stability 
• Predictability
• Protection against rising interest rates

FRMs also have disadvantages, including: 

• Higher interest rates
• Limited flexibility
• Less opportunity for savings if interest rates go down

What is an adjustable-rate mortgage?

An ARM is a type of mortgage in which the interest rate fluctuates periodically based on an index, such as the prime rate. As a result, the borrower’s monthly mortgage payments can change over time, too.

ARMs tend to have lower interest rates than FRMs, making them an attractive option for homebuyers looking to save money on interest payments. They can also be a great choice for borrowers who plan to sell their homes before the interest rates rise significantly.

What are the pros and cons of adjustable-rate mortgages? 

ARMs have several advantages, including: 

• Lower interest rates
• Potential savings if interest rates drop
• Increased flexibility

ARMs also have several disadvantages, including: 

• Higher risk of rising interest rates
• Uncertainty and unpredictability
• More difficult to budget and plan for future expenses

How do I choose the mortgage that’s right for me?

When choosing a mortgage, consider the following factors:

• Your current financial situation. Can you afford the higher interest rate on an FRM?
• Your long-term plans. Do you plan to stay in this home for the full mortgage term? 
• Current market conditions. Are interest rates currently rising or falling? 
• Your personal money management style. Do you prefer to have your expenses lined up neatly in advance?

Use this guide to learn the differences between FRMs and ARMs so you can make the best decision for your mortgage.