Pros and Cons of Fixed and Adjustable Rate Mortgages (ARMs)

The most important elements to consider when taking out any mortgage are the term length and the rate of interest. The mortgage term usually ranges from 15 to 30 years, although longer terms are not unheard of. The rate of interest can be calculated either as a fixed rate or adjustable rate. A traditional fixed-rate mortgage may require a higher initial payment and longer terms. But it allows you to know what your payments will be every month for the entire term of the loan. It also protects you against rising interest rates in the future, since your interest rate cannot change no matter what the market conditions may be.

An adjustable-rate mortgage (ARM) often provides an attractively low rate of interest, and thus lower monthly payments, during an initial phase. However, after that initial period, interest rates could rise if rates in the general market go up. This type of loan has greater insecurity but may be advantageous for people who don’t plan to stay in a home long enough for the rates to rise, or feel confident that present rates will fall.

Let’s examine the details of each loan type so that you can determine which might be best for your situation. Keep in mind that loan structures may be complicated. That’s why we’re always available on the phone to help you fully understand any loan package you might be considering.

Fixed-Rate Mortgages

A fixed-rate mortgage charges a set rate of interest throughout the life of the loan. It protects borrowers from interest rate rises in the mortgage market.

Adjustable-Rate Mortgages

With an adjustable-rate mortgage (ARM), the initial interest rate will be lower than that on a fixed rate mortgage. It will stay at that level through an initial period which can last from one to 10 years. After that initial period, the rate can move higher or lower depending on various factors.

What’s the Conclusion?

There are pros and cons to both fixed-rate and adjustable-rate mortgages. Fixed-rate mortgages provide the security of knowing what your payments will be over the length of the loan. They also protect you from a rise in interest rates in the mortgage market. Adjustable-rate mortgages offer the trade-off of initial low payments in exchange for possibly higher payments and interest in the future. The choice of mortgage type will depend on your personal circumstances. We can help you make the calculations to determine which type of mortgage will be most advantageous in your situation.