Deciding Between a Fixed vs Adjustable Rate Mortgage
Deciding between a fixed vs adjustable rate mortgage can have a major impact on your home financing, and choosing the best option starts with knowing the pros and cons of each.
Pros & Cons: Fixed Rate Mortgage
The main benefit of a fixed mortgage is that your payment stays the same throughout the loan. However, if rates are high, a fixed mortgage can be an expensive choice since there aren’t any initial rate cuts. And if you want to take advantage of dropping rates, you have to pay extra fees to refinance.
Pros & Cons: Adjustable Rate Mortgages (ARM’s)
An adjustable rate mortgage (ARM) can help you afford a bigger mortgage because the initial rate is usually lower than market rates. If you expect your income to rise or plan to sell the house in under five years, ARMs may be a good option. Plus, if rates begin to fall, you don’t need to refinance because your payments automatically drop with the rates. However, when rates rise, ARM rates and payments can jump significantly, even with caps in place. Your first adjustment can be especially dramatic since caps don’t always apply to the first adjustment.
Interest Rates Are A Major Factor
In the past few years as interest rates dropped, ARMs saved borrowers a lot of money. However, rates are now at historic lows. Thanks to all the government stimulus spending, inflation is expected to rise in the next year, therefore interest rates will rise too. Since a fixed rate guarantees a historically low rate over the long term, many people believe it’s the right choice for the times.
Talk To Your Loan Officer
However, the only way to know for sure is to have an analysis done of your financial situation. If you don’t have much equity, are worried about your job and can’t afford to have your mortgage payments rise, a fixed rate may be best. On the other hand, if you have lots of assets, stable income and can live with some payment fluctuation, you may do better with an ARM—especially if you have some good rate caps in place. As your local mortgage advisor, I’d be happy to perform a free mortgage analysis to help you with this important decision.
Call me today!