It’s Important to Compare Mortgage Types
There are many types of mortgages — fixed rate, adjustable rate, FHA, VA, jumbo, investment property and more. Each type works a bit differently, offering more people opportunities to finance the purchase of a home in a way that suits their circumstances.
For example, a home buyer with a lower credit score and small down payment may be best served by an FHA loan, insured by the Federal Housing Administration. Someone who needs to borrow $500,000 will need a jumbo mortgage. VA loans help service members and veterans become homeowners.
However, the two main types of home loans are fixed-rate mortgages and adjustable-rate mortgages, and for most people, the choice will come down to these two. It’s important to compare mortgage options carefully rather than rush into a decision.
Differences Between Adjustable-Rate Mortgages (ARM) and Fixed-Rate Mortgages
Each of these mortgage options has pros and cons that make them more suitable for some home purchasers than others. The right choice for you will depend on your financial situation, plans for the future, and even your personality.
The main difference between fixed-rate and adjustable-rate loans is the way the interest rate is structured, but this difference has multiple consequences for how and when home buyers may wish to use them.
Here is an overview of some of the features of an FRM or an ARM:
| Fixed-Rate Mortgage (FRM) | Adjustable-Rate Mortgage (ARM) |
|---|---|
| A set rate of interest that remains the same for the life of the loan | Rate is lower at the beginning but subject to changes over time; market shifts determine how the rate changes |
Fixed Rate Mortgage
For a fixed-rate mortgage, the interest rate remains constant throughout the life of the loan. Although the amount of principal and interest included in each payment varies from month to month, the total payment remains the same.
The main advantage of a fixed-rate loan is that the borrower is protected from sudden increases in monthly mortgage payments if interest rates rise. A fixed-rate loan makes budgeting easier. The main disadvantage is that these loans can be difficult to qualify for and are more expensive when interest rates are high. Also, a borrower may qualify for a smaller FRM than ARM.
While the initial rate may be higher than that for an adjustable-rate mortgage, the stability of this type of loan is appealing to many buyers. It’s easy to understand and it makes budgeting simpler. This loan can be a good option for home buyers who plan to stay in their home for many years. It is also attractive to borrowers who expect their income to be stable over time.
Adjustable Rate Mortgage
Adjustable-rate mortgages have an initial period of fixed interest, after which the interest rate and payment adjust at specific intervals. In general, the interest rate and monthly payment for an ARM start off below the market rate for a fixed-rate mortgage of the same amount. However, they can become higher (or lower) after a few adjustments.
The biggest advantage of an ARM is its initial affordability. Home buyers may qualify for a larger ARM than FRM. However, rates and payments will vary, and a sharp rise in market rates could result in higher payments than a borrower has budgeted for. ARM rate changes can be complicated to understand, but it is critical to know the possibilities. Most adjustable-rate loans have a cap on the amount the interest rate can rise each period and a ceiling on the total allowable increase over the life of the loan.
An ARM may be a good option for people who expect their income to increase significantly or plan to sell in a few years.
Adjustable Rate vs. Fixed Rate Mortgage: Choose the Right Mortgage Option For You
So how can you decide which mortgage option is best for you? Think about your income now and your income expectations for the future. Think about large future budget items, like potential new family members, and how much those might cost. Consider how much house you need now and may need in the future. Weigh your appetite for risk vs. your desire for security, then contact our Bethpage mortgage team, for informed advice.
Check our competitive rates for both fixed- and adjustable-rate mortgages to help with your decision.
Then, if you’re ready, apply for the loan of your choice today!