If you’re considering purchasing a home, it’s important to compare your mortgage options. But it’s not just a matter of which loan offers the best rate—you also need to consider whether you want a fixed-rate mortgage or adjustable-rate mortgage (ARM).
The main difference between the two is that a fixed-rate mortgage locks in your interest rate for the duration of the loan. An ARM, on the other hand, typically offers a fixed interest rate for a short period of time. After that period ends, the rate fluctuates. Here’s a quick look at the pros and cons of both options.
Many ARMs offer a low introductory interest rate, according to the Consumer Financial Protection Bureau, which means you may pay lower monthly mortgage payments with an ARM at first compared to a fixed-rate loan.
But after the promotional period ends, your interest rate can fluctuate and increase. The length of the promotional period can last anywhere from several months to several years. It’s important to understand the terms of your loan before you move forward, including whether the ARM has a cap on how much the interest rate can increase after the introductory period ends.
An ARM can be a good option for buyers who plan to quickly pay off their mortgages, or for those who plan to sell a home not long after purchase. For example, a buyer might take out an ARM that guarantees a low interest rate for the next five years. If the buyer plans to sell the house in five years or less, they may not need to worry about changes in the interest rate.
On the other hand, any mortgage with a fluctuating interest rate requires some risk tolerance. Unexpected shifts in the economy and the housing market can disrupt even the best-laid plans. If your goals change or you aren’t able to sell your house as quickly as you expected, your mortgage payment could increase as your interest rate fluctuates.
A fixed-rate loan guarantees your interest rate for as long as you have the loan. This offers peace of mind for homeowners on a budget: You can be confident that your loan payment will stay the same every month with your interest rate locked in place.
Compared to an ARM, your monthly payment on a fixed-rate mortgage might be higher, at least at first. But a fixed-rate loan is a good option for buyers who prefer to know exactly what their mortgage payment will be each month with no surprises.
Not sure which loan is right for you? Contact a local WaterStone Bank Lender to review your options and find the right fit for your needs.
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