Mortgages 101: Fixed-Rate Mortgages vs. Adjustable-Rate Mortgages Roger Odoardi When shopping for a mortgage, first you should understand the two main options that are available: fixed-rate mortgages or adjustable-rate mortgages. Adjustable-rate mortgages are known for their low initial costs, while fixed-rate mortgages have a reputation for providing borrowers with a solid sense of financial predictability. But even though each have great selling points, there’s likely one that’s better suited for you both personally and financially. What is an Adjustable-Rate Mortgage? An adjustable-rate mortgage (ARM) will have a varying interest rate over the lifespan of your loan. However, ARMs do have a certain period at the beginning of the mortgage where you will see consistent, fixed payments and lower initial interest rates. This period of enjoying consistent monthly payments can last anywhere from one month to several years. After this initial period, your rates will adjust at a pre-determined frequency, such as a 5/1 ARM which is fixed for five years, then adjusts every one year thereafter. That means you will be held to inconsistent payment requirements over the remaining terms of your mortgage. To put this into perspective, a 6% ARM could eventually end up at 11% in as little as three years if rates rise sharply. Advantages of an Adjustable-Rate Mortgage Lower initial interest rates. Borrowers that agree to a shorter adjustment period will often receive lower initial interest rates. Lenders can qualify borrowers using the lower payments, which means buying a larger, more expensive home is a greater possibility. Disadvantages of an Adjustable-Rate Mortgage ARMs can be difficult for first-time homebuyers to understand and borrowers can be taken advantage of due to the flexibility lenders have with determining the loan terms. Your rates and payments will have the potential to rise considerably throughout the loan period, creating financial inconsistencies. If you have an ARM for long enough, the eventual interest rate will far surpass that of a fixed-rate loan. Ideal Adjustable-Rate Mortgage Borrower If you’re not set on staying in the same location, an adjustable-rate mortgage might be your best bet. If you want to relocate or move into a bigger place before the introductory period of your mortgage ends, you’ll have reaped the benefits of a lower interest rate without having to deal with the fluctuating monthly payments. What is a Fixed-Rate Mortgage? A fixed-rate mortgage (FRM) maintains the same interest rate throughout the lifetime of your loan. This protects borrowers from increases in monthly mortgage payments because of rising interest rates, and offers a strong sense of financial predictability. Even though your interest rate is fixed, the actual amount you’ll pay each month with be dependent on the terms of your mortgage. The most common loan terms are 15, 20 or 30-year mortgages, with 30-year being the most popular choice because it usually offers the lowest monthly payment. Advantages of a Fixed-Rate Mortgage Easily understood terms with little variation between lenders. Consistent monthly payments that aren’t dependent on fluctuating interest rates. Offers a sense of stability to borrowers, which can make budgeting and planning for the future a lot easier. Disadvantages of a Fixed-Rate Mortgage If you want to take advantage of falling interest rates, you’re going to have to refinance. When interest rates are high, qualifying for a loan is more difficult because the payments are less affordable. It can’t be customized for individual borrowers because FRMs are commonly only listed on the secondary market. Ideal Fixed-Rate Mortgage Borrower Since fixed-rate mortgages are simple to understand, they are commonly preferred among first-time homebuyers. If you’re looking to plant your roots in an area where you can see yourself long-term, this loan option may be the best route for you. Keep Your Best Interests in Mind While you may be gravitating toward a specific mortgage type, you should first consider both options thoroughly. Mainly, make sure to take into consideration your personal and financial factors. While you might like the stability of a fixed-rate mortgage, if you have a career that relocates you all over the country every few years it might end up costing you more in the long-run. When it comes to a fixed-rate mortgage vs. an adjustable-rate mortgage, it’s key to understand that mortgage rates are constantly changing. Blue Water Mortgage is well-versed in both fixed-rate and adjusted-rate mortgages, and we’d love to help you determine which is right for you. Contact us today to speak with one of our qualified loan officers. Roger Odoardi Roger is an owner and licensed Loan Officer at the Blue Water Mortgage office in Hampton, NH. Roger graduated from the University of New Hampshire Whittemore School of Business and has been in the mortgage industry for over 20 years. Roger has originated over 2500 residential loans and is licensed in New Hampshire, Massachusetts, Maine, Connecticut and Florida.