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How do you choose between a fixed-rate and adjustable-rate mortgage?

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Choosing between a fixed-rate and adjustable-rate mortgage (ARM) is one of the most important decisions you will make as a first-time home buyer. Both types of loans have pros and cons, depending on your financial situation, goals, and preferences. In this article, we will explain the main differences between fixed-rate and adjustable-rate mortgages, and how to weigh the factors that influence your choice.

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1 What is a fixed-rate mortgage?

A fixed-rate mortgage is a loan that has the same interest rate and monthly payment throughout the entire term, which is usually 15 or 30 years. This means that you can lock in a low rate when you apply for the loan, and enjoy the stability and predictability of knowing exactly how much you will pay each month. A fixed-rate mortgage is a good option if you plan to stay in your home for a long time, or if you prefer to avoid the risk of rising interest rates in the future.

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2 What is an adjustable-rate mortgage?

An adjustable-rate mortgage is a loan that has an interest rate that changes periodically, based on a market index and a margin. This means that your monthly payment can go up or down, depending on how the index moves. An ARM usually has a lower initial rate than a fixed-rate mortgage, but it can increase after a certain period, such as 5, 7, or 10 years. An ARM is a good option if you expect to move or refinance your home before the rate adjusts, or if you can afford to handle the potential fluctuations in your payment.

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Robert "Bob" Mitchell

Bob "The Mortgage Coach" Mitchell
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First, we take your ARM, then we take your LEG! lol, except in certain circumstances where you are pretty sure that you're not going to be in the home for very long, I'm not a big fan of ARMS. First, the devil is in the details...what is the starting rate? Then, what is your index and what is the lender's margin. What are the adjustment caps and do they round up or round down....all questions that you need to answer before taking an ARM.

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3 How to compare fixed-rate and adjustable-rate mortgages?

When comparing fixed-rate and adjustable-rate mortgages, you should take into consideration several factors, such as the current and projected interest rates in the market. Online tools and calculators can be used to compare the average rates and payments for different types of loans, and to see how they might change over time. Additionally, you should consider the length of time you plan to stay in your home; if you intend to live in your home for more than 10 years, a fixed-rate mortgage might be more beneficial. Alternatively, if you plan to sell or refinance your home within a few years, an ARM could save you money due to its lower initial rate. Lastly, the amount of risk you are willing to take should be taken into account; a fixed-rate mortgage offers more security, while an ARM offers more flexibility.

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Robert "Bob" Mitchell

Bob "The Mortgage Coach" Mitchell
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I agree with everything that the article points out here...about comparing fixed rate to adjustable rate mortgages, EXCEPT, where they use a 10 year hold as to when the fixed rate will be better...I'd put that time period at about 4 to 5 years before it's a no brainer to take the fixed rate. Just my 2 cents worth!

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4 How to choose the best mortgage for your situation?

Ultimately, the best mortgage for your situation depends on your personal preferences, goals, and circumstances. There is no one-size-fits-all answer, as different borrowers have different needs and expectations. However, if you value stability and consistency, a fixed-rate mortgage may be the best option for you. It is ideal if you have a steady income, a good credit score, and a large down payment. You can also opt for a shorter term such as 15 years in order to pay off your loan faster and save more on interest. On the other hand, if you value flexibility and opportunity, an adjustable-rate mortgage (ARM) might be the better choice. An ARM is suitable if you have a variable income, a moderate credit score, and a smaller down payment. You can also choose a longer term such as 30 years to lower your monthly payment and free up some cash for other expenses.

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Denise Panza

Senior Mortgage Banker | Mortgage Consulting
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I have always been a fan of adjustable rate mortgages, as a matter of fact w/ my last two homes I only took a mortgage w: an adjustable rate. Why you ask ? Well for one an adjustable rate is lower than a fixed rate so the savings can be terrific… I typically will do a 5/1 arm which means the interest rate is fixed for five years, it will never change, the payment will never change, and then on the anniversary going into the 6th year, it can change, it can go up, but it can also go down depending upon the market. So, again depending upon the loan size, the savings each month can be pretty significant. Plus a lot can happen in five years. Some folks end up relocating or buying a bigger and better home while some downsize after a few years.

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5 How to get the best deal on your mortgage?

When looking for a mortgage, you want to get the best deal possible. To do this, it’s important to shop around, compare offers from different lenders, and negotiate the terms and fees. Here are a few tips to help you get the best deal on your loan: Start by checking your credit report and score before applying for a loan. This information affects your eligibility and interest rate. You can improve your score by paying bills on time, reducing debt, and avoiding new credit inquiries. It’s also beneficial to get pre-approved for a loan before starting to look for a home. This shows that you are qualified and ready to buy a home and gives you an advantage over other buyers. Once you have chosen a lender, compare at least three loan offers from different lenders. Consider not only the interest rate but also the APR, which includes fees and charges associated with the loan. You should also compare the loan features such as term, type, points, closing costs, and penalties. Finally, negotiate the best terms and fees for your loan. Ask the lender to lower the interest rate or waive some fees or match a competitor’s offer. You can also ask the seller to pay for some or all of the closing costs or include a home warranty or other incentives. Paying points—upfront fees that reduce your interest rate—can also help save money.

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Robert "Bob" Mitchell

Bob "The Mortgage Coach" Mitchell
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The "Best Deal" on a mortgage isn't always the one who is quoting you the lowest rate/point combination. This is especially true if you're a first time home buyer or have any kind of special circumstances that might have to be worked around, such as credit issues, job changes, etc. If you're the prefect borrower (great credit, good time on the job, low debt to income ratios, etc., then you MIGHT be fine with a headset lender. Otherwise, I think that securing the services of a specific, experienced loan officer is generally a better deal...even if it costs you an 8th or a 1/4 in rate.

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Mark Bradford

I Make Home Ownership Affordable--Lending all Across America
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The best deal does not always carry the lowest rate, especially if that rate involves points and such, which is reflected in the APR. When comparing loan costs, look at the actual costs of the loan, sections A through E on the loan estimate. Sections F and beyond are prepaids and those are almost always going to be an amount they are going to be no matter who the lender is. Section F and beyond account for taxes and insurance. The lender cannot control that. Sections A through E and the amount there, will show you the true costs of the actual loan.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you choose between a fixed-rate and adjustable-rate mortgage?

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1 What is a fixed-rate mortgage?

2 What is an adjustable-rate mortgage?

3 How to compare fixed-rate and adjustable-rate mortgages?

4 How to choose the best mortgage for your situation?

5 How to get the best deal on your mortgage?

6 Here’s what else to consider

Working with First-Time Home Buyers

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