Adjustable-Rate Morgage (ARM) vs Fixed Rate: Which is Better?

You may have finally found the house of your dreams – now it’s time to figure out how you are going to finance it. With the various types of loans available for borrowers, two of the more popular loan types include adjustable-rate mortgages (ARMs) and fixed-rate mortgages. While both of these loan types have their advantages and disadvantages, it is important to determine which loan type is the best option for you and how they align with your financial goals/plans. 

Fixed-rate mortgages charge a specified interest rate that will remain unchanged during the entirety of the loan. The total payment month over month will remain the same and will never change for the borrower, making it much easier to budget and account for what your payments will be. Borrowers are protected from any sudden increases in monthly mortgage payments in environments where interest rates are increasing. The main drawback to this loan type is that when interest rates are high, qualifying for a loan becomes much more challenging as payments become less affordable. Most fixed-rate mortgages include 30, 20, and 15-year timeframes for loan repayment, with shorter-term loans costing more month over month but less overall. 

As opposed to fixed rates and the same monthly payments, Adjustable-rate mortgages (ARMs) offer variable interest rates that will change within a specified timeframe. The initial interest rate of an ARM will be below the market rate and be much more enticing to borrowers due to their lower rates, but this rate will ultimately change over time and eventually surpass the going rate for fixed-rate loans. Over the first few years, borrowers will have lower payments and then will experience incremental increases ranging from monthly to yearly. This makes budgeting more challenging to consumers, as these payments are variable and may skyrocket upward, leading to potential default if one can not afford the new payments. Adjustable-rate mortgages (ARMs) may be a smart financial decision for those seeking to sell the house before the new variable rates kick in, but overall this option is not recommended for long-term borrowers.