What is the Difference Between a Fixed and Adjustable Rate Mortgage?

posted in: Financial Tips 0

Fixed and adjustable-rate mortgages (ARMs) are the two most common types of mortgages. The first step when deciding on a mortgage is to decide if a fixed-rate mortgage or an ARM is better for you.

Once you decide between a fixed-rate mortgage and an adjustable-rate mortgage, you can then settle on other important aspects of the mortgage such as the length and lender.

Fixed-Rate Mortgage

With a fixed-rate mortgage, what you sign on for is what you get. When you receive your mortgage agreement, it will list a set interest rate. This interest rate should not change throughout the term of your mortgage.

Having a fixed-rate mortgage can make it easier to budget as a homeowner. Even if interest rates rise, you’re protected against this by having a signed contract with a fixed-rate mortgage rate.

Typical fixed rate mortgages can be 15 or 30 years.

 

Adjustable Rate Mortgage

ARMs have a fixed-rate period at their beginning, during which the initial interest rate remains the same. But after that set amount of time, the interest rate adjusts at a set frequency. The fixed-rate period can vary significantly depending on your specific mortgage; it can be anywhere from one month to 10 years. After the initial term lapses, the new interest rate is based on the terms of agreement signed by the borrower. The rate is then reset for the time period the borrower agreed to, and the resetting process continues on for the 15 or 30 years depending on the terms of the mortgage.

One of the advantages of an ARM is that the loan’s monthly payment could be considerably less than a fixed-rate mortgage, at least for the first few years.

A borrower who chooses an ARM may save several hundred dollars a month, but once the rates reset, their costs are likely to rise. If interest rates increase, so will your mortgage interest rate. However, if federal interest rates decrease, your mortgage’s interest rate may decrease as well.

 

Do you need help deciding which option is best for you? Let us know!

Let Camino help you. We want our members to find the best option that works for their needs. We offer many options for those looking to purchase or refinance a home. Please give us a call at 800-835-3400 to speak with one of our Member Advisors, or contact us for more information.  NLMS ID 666196

Leave a Reply

Your email address will not be published. Required fields are marked *