Adjustable vs. Fixed Rate Mortgages

If you have been in the market to purchase a home, you have undoubtedly heard terms like “fixed rate” and “adjustable rate,” but which is best for you?

The low initial cost of an adjustable-rate mortgage, or ARM, is tempting to many homebuyers, but they do carry more uncertainty than the alternative.

A fixed-rate mortgage may be more costly initially, but the security of knowing your payment will remain consistent throughout the life of the mortgage is important for many.

If you are unsure about which is best for you, the following list of pros and cons will help you decide.

Adjustable-Rate Mortgages

Advantages

• A lower initial interest rate and thus a lower payment amount.
• A borrower may qualify to buy more house than they otherwise would.
• A borrower can take advantage of falling interest rates without Instead of having to pay closing costs and fees all over again, a borrower with an ARM can simply watch their payments decrease.
• The opportunity to invest and save more effectively. With a lower interest rate, a borrower could invest the money left over each month into a higher-yielding investment.
• For borrowers who do not plan on living in one house for very long, it offers a more cost-effective

Disadvantages

• Interest rates can increase significantly over the life of the mortgage. If rates rise sharply, so will your mortgage payment.
• ARMs are far more complex than fixed-rate mortgages. From margins and caps to adjustment indexes, it is easy to get confused about what exactly is happening.

Fixed-Rate Mortgages

Advantages

• Payments are always consistent regardless of what happens in the economy, making financial planning a simpler task
• They are easy to understand, which is good for a first-time homebuyer who does not know the ins and outs of an ARM

Disadvantages

• If interest rates fall, a fixed-rate mortgage holder has to refinance to take advantage. This process typically involves thousands of dollars in closing costs, and time spent organizing documentation.

Let Us Help

If you are still not sure which route is best for you, the loan experts at Butler Mortgage are here to help. Call us today at 407-931-3800 to schedule a consultation with one of our loan officers who can walk you through each step of the mortgage process.