ARM vs. Fixed Rate Home Loans


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.

ARM vs Fixed rate loans in Missouri and nearby areas

Adjustable-Rate Mortgage Loans

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.

Fixed-Rate Mortgage Loans

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 we work hard to find the best mortgage for each individual. If you’re beginning the mortgage process, let us know. We’d love to help you find the best loan for your lifestyle.

FAQs: ARM vs. Fixed Rate Home Loans

What is an adjustable-rate mortgage (ARM) and how does it work?

An adjustable-rate mortgage (ARM) starts with a lower interest rate and payments, making it initially attractive. However, after the initial period, the interest rate can increase based on broader economic conditions, leading to higher payments. For example, a 5/1 ARM has a fixed rate for the first five years, after which the rate can adjust annually. Despite potential rate caps, the uncertainty and possible increases can make ARMs more expensive in the long run compared to fixed-rate mortgages.

What is a fixed-rate mortgage and why might it be beneficial?

A fixed-rate mortgage offers a constant interest rate for the duration of the loan, ensuring that your monthly payments remain the same throughout the loan term. This stability makes budgeting easier and protects you from unexpected rate increases. Although fixed-rate mortgages may initially have higher interest rates compared to ARMs, they often end up being less costly over time due to the absence of rate fluctuations.

How do the interest rates of ARMs and fixed-rate loans compare over time?

Initially, ARMs have lower interest rates compared to fixed-rate mortgages, making them attractive for short-term affordability. However, after the fixed period ends, ARM rates can increase based on market conditions, potentially surpassing the rates of fixed-rate mortgages. In contrast, fixed-rate mortgages maintain the same rate throughout the loan term, offering long-term stability and potentially lower overall costs despite starting with higher rates.

Why might a fixed-rate mortgage be easier to understand compared to an ARM?

Fixed-rate mortgages are straightforward, with consistent payments that make financial planning simpler. In contrast, ARMs can be complex due to their variable nature and potential for rate increases, which can cause confusion and financial insecurity. The predictability and simplicity of fixed-rate mortgages provide homeowners with a sense of security and ease of management, making them a popular choice among American homebuyers.

USA Mortgage Abadi Region

USA Mortgage Abadi Region

A full-service mortgage lender with local branches in Missouri, Arkansas, Illinois, and nearby areas.