What's the Difference Between Fixed and Adjustable-Rate Mortgages?

Purchasing a home is one of the largest and most significant financial decisions you can make in your life, and one worthy of intentional thought. If you’ve started perusing home listings, now’s the time to start thinking about which type of home loan is right for you. Depending on your circumstances, there generally are two main options when it comes to mortgages: a fixed-rate mortgage and an adjustable-rate mortgage (ARM).

So how do you know which option is going to be best for you? You may find yourself wondering, what is a fixed-rate mortgage? What is an ARM loan? We know that, with this being such a big decision, it can feel overwhelming at times trying to choose between a fixed or adjustable-rate mortgage. Read on to help decide which one is right for you.

Fixed-rate mortgage

A fixed-rate mortgage carries the same interest rate and monthly payment over the life of the loan. The main advantage of a fixed-rate loan is that you are protected from sudden increases in monthly mortgage payments if interest rates rise. This stability can bring peace of mind to many home buyers. It also helps you more easily forecast future spending.

It’s important to note that your mortgage payment may fluctuate, but only because of changes in property taxes or homeowners insurance. However, your monthly mortgage rate will stay the same over the lifetime of your mortgage, so that’s not something that you need to worry about.

So how do you know if a fixed-rate mortgage is the right option for you? Fixed-rate mortgages are ideal for home buyers who plan on staying in the home for a long period of time or prefer the consistency of a set monthly payment. If you’re going to be in your home for more than five years, or if interest rates are incredibly low, this is a great option to consider.

Adjustable-rate mortgages

Adjustabe-rate mortgagess, also known as ARMs, are designed so their interest rates can go up or down over the life of the loan. Generally, with an ARM, you’ll get a lower interest rate for the first few years, but then you'll need to anticipate it rising or falling at specified intervals.

For instance, one of the most popular ARM options is the 5/1 ARM. It has a low, fixed-interest rate for the first five years, and once this time period ends, the rate is adjusted with current market conditions. Keep in mind that lower interest rates have the ability to help you build equity faster, so take advantage of those first five years on your adjusted-rate loan. Be sure to stay consistent with those payments—this will work wonders for improving your credit score.

ARMs are ideal for homeowners who plan on moving within a half dozen years or who expect a significant income growth over the next few years. So if you’re planning on making another big move five to six years after purchasing this home, this could be a great option for you to consider.

Making your decision

Fixed-rate mortgages and adjustable-rate mortgages both offer a unique set of pros and cons, and there isn’t one mortgage type that works for every person and every situation. That’s why it’s so important to do your research so you can understand the difference between the two, and then make a decision that's going to work best for you and your financial situation. This is your future, and the time you put into it will definitely be worth the investment!

Ultimately, your decision to get a fixed-rate or adjustable-rate mortgage comes down to a range of personal factors and your financial situation (both now and in the coming years). We know this is a huge decision, and one that shouldn't be made lightly. If you’d like to discuss your options in more detail, a Mountain America mortgage specialist would be more than happy to walk you through the process.

To see the difference in payments, schedule a meeting with one of our mortgage experts.