Applying for a mortgage can feel overwhelming at first, especially if you aren’t familiar with industry jargon. Two terms that are often thrown around are adjustable-rate mortgages, or ARMs, and fixed-rate mortgages. Understanding the differences between these two types of mortgages will make you feel more comfortable and confident with the application process. They may sound similar, but in reality ARMs and fixed rate mortgages are very different.
When people sign on for adjustable rate mortgages they are agreeing to uncertainty. ARMs can be enticing because of their lower rates and payments, but these terms are only valid at the beginning of the loan term.
After the initial period, which features low payments, interest rates may increase, and they can do so quickly. An initial 4 percent ARM can rise all the way up to 9 percent just a few years after closing. ARM interest rates are determined by the broader economy.
ARMs are typically accompanied by two numbers, such as 5/1. The first number expresses the number of years that the rate is fixed for, and the second number shows how often the rate can be adjusted each year thereafter. In the 5/1 example, the rate is fixed for five years and can then be adjusted once a year. Some ARMs have caps for how high your rate can go, but even so you may end up paying more for your home with an ARM than you would with a fixed-rate mortgage.
With a fixed-rate mortgage, what you sign on for is what you pay for the duration of your loan. Your interest rate will always remain constant, so you’ll never get shocked with a higher-than-usual payment. Fixed-rate mortgages make money management much easier because your housing payments will never vary. And although they may appear to have higher interest rates than ARMs, they can end up being less expensive in the long run. ARMs low-interest rates are only for a fixed term, and after that they can periodically increase.
Fixed-rate mortgages are also easier to understand, a characteristic that should not be overlooked. ARMs can be confusing to homeowners, and you’ll never feel secure with your mortgage if you don’t completely grasp its terms. Fixed-rate mortgages provide the security and assurance that most homeowners are looking for.
Fixed-rate mortgages are by far the most popular choice among American homebuyers, and they are typically the ones I recommend. However, everyone’s situation is different and I work hard to find the best mortgage for each individual. If you’re beginning the mortgage process, let me know. I’d love to help you find the best loan for your lifestyle.