Getting a mortgage is a big first step that is often a milestone on the way to home ownership. Mortgages are a path many have tread before, but the way you engage in this particular journey will depend on whether you get a fixed rate mortgage or an adjustable rate mortgage (ARM). Neither type of mortgage is automatically better than the other, but the two have certain traits that make them more appealing in different circumstances. Understanding the strengths of each type will let you make the most appropriate and financially beneficial decision.
The Fixed Rate Mortgage and Its Features
With a fixed rate mortgage, the interest rate is fixed and unchanging for the duration of the term. This affords you a useful level of security and consistency that makes budgeting for payments easy and predictable. Property taxes and insurance costs may change, but a fixed rate mortgage will remain the same.
Fixed rate mortgages tend to have longer terms that start at the 10-year mark and can go up from there. Shorter terms mean larger monthly payments but also allow the amount of interest paid to be reduced significantly. Due to the length of the terms, fixed rate mortgages are preferred when you plan on staying in the home for the duration of the loan.
The Adjustable Rate Mortgage and Its Features
The word “adjustable” can make borrowers nervous, but there is little to fear about an ARM. The concern comes from the fact that the interest rate in an ARM is not set and can change—going up or down depending on the state of the market. The fear of seeing your payments go up is understandable, but there are certain traits to an ARM that make it more appealing when you look below the surface.
The terms of an ARM are usually described as something like “3/1” or “5/1” or even “10/1.” What this means is that the interest rate will be fixed for the first three (or five or 10, etc.) years and can then undergo one change before the fixed period kicks in again. To protect the borrower, there are caps on how much the rates can actually rise and the potential increase for any given ARM is best explained by your lending institute. However, it is important to note that there is also the potential for the interest rate to decrease as well.
Which Mortgage Should You Choose?
With all of the above in mind, deciding whether to go with a fixed rate mortgage or ARM can be done by looking at your current circumstances and matching them up to the traits of each loan. You can also try out our ARM vs. Fixed Rate mortgage calculator.
Here are some of the key points to factor in to your decision:
- An ARM has a lower interest rate and helps build equity quicker. This makes them more suitable when you don’t plan on staying in the home for a long period.
- Similarly, first-time homebuyers can benefit from an ARM since they are more likely to sell their home within the first seven years, on average.
- People looking to settle down and stay put can get more benefit from the consistent nature of a fixed rate mortgage.
- If interest rates are currently low, a fixed rate mortgage will let you lock in the lower payments.
- If interest rates are high, an ARM will let you get the mortgage you need immediately but let your interest rate go down once things settle.
When it comes to making the best financial decisions, LUSO Federal Credit Union is here to help. LUSO is a member-owned, not-for-profit financial cooperative dedicated to providing its members with quality financial services and products including both fixed rate and adjustable rate mortgages. We at LUSO pride ourselves on serving the financial needs of those who live, work, worship, do business, or attend school throughout Hampden County, Springfield, and Chicopee, Massachusetts, regardless of economic status.
Feel free to contact our LENDING HOTLINE at 888-848-5876.