Fixed vs. Adjustable Rate Mortgages: Choosing the Right Option for You

Where Is the Distinction?

The names tell it all. A fixed-rate mortgage carries an interest rate that remains constant throughout the term of the loan. This means that, aside from collections for escrows, the monthly payment remains the same for 15,25 or 30 years. Nothing that happens in the broader economy can affect the principal and interest a borrower pays each month when the rate is fixed. If rates are low when application is made, the borrower is well-positioned but if rates are high, only refinance later on can change the payment.

Adjustable-rate mortgages (ARMs), on the other hand, are subject to market forces and other variables that cause the interest rate to change, sometimes from month to month. One attraction for ARMs is the initial rate charged, usually lower than that of the fixed-rate product. Of course, as the term advances, that rate is raised or lowered by world events, Federal Reserve actions and the real estate market, to name a few factors. Over time, a borrower with an ARM can end up paying a much higher rate than if he or she chose the fixed-rate mortgage. Then again, maybe not.

Is One Better than the Other?

Many reasons back whether an applicant would choose an ARM or a fixed-rate loan. For one thing, temperament: some people feel better with a payment that is enduring and exact, even if it is higher than they would like. Yet many, excited by a low initial interest rate, are optimistic about the economic future, counting on personal financial capacity and positive economic trends to keep payments modest and manageable. When underwriters approve ARMs, they do so based on a cap, i.e. a maximum rate above which the lender cannot charge. Nevertheless, even though a borrower has the revenue and funds to make payments at a higher rate, doing so might slow or neutralize other financial aims: saving for a child's college expenses; planning for a larger family; caring for an aging parent, e.g.

So, a prospective borrower needs to consider personal inclination, financial ability, and long-term goals for the family when choosing between a fixed-rate mortgage and an ARM. Seeking mortgage advice is also advantageous. After all, a fixed-rate product could work against a borrower's plans when economic times lead to falling rates just as an ARM does likewise when rates are climbing. Sometimes, home buyers (and owners) need the perspective of a third party, a professional who sees both types of mortgages at work before determining which type of loan to pursue.

Getting Help

A seasoned loan officer or mortgage consultant often sees both successes and failures with both types of home loans. Drawing from this experience, such a professional can lend a broader viewpoint on your mortgage decision. This does not replace your own wisdom; it complements it. Before making a final decision, get mortgage advice from a specialist who can clarify your available choices.