Fixed vs Adjustable Rates

When purchasing a home or refinancing an existing mortgage, one of the most important decisions you'll make is choosing the type of mortgage that best suits your financial situation and long-term goals. Two of the most common options are fixed-rate mortgages and adjustable-rate mortgages (ARMs). Each has its own advantages and risks, and understanding the differences can help you make an informed decision. Let's highlight the key features as well as pros and cons of each type. 

Fixed-Rate Mortgages

A fixed-rate mortgage offers predictability and stability. With this type of loan, the interest rate remains constant throughout the life of the loan, which means your monthly principal and interest payments will never change.

Key Features of a Fixed-Rate Mortgage

• Interest Rate: Locked in at the time of loan origination and doesn’t change.

• Loan Term: Common terms are 15, 20, or 30 years.

• Monthly Payments: Principal and interest payments remain consistent over the life of the loan.

Pros of a Fixed-Rate Mortgage

• Easier to budget since payments don’t fluctuate.

• Protection from rising interest rates.

• Ideal for long-term homeowners.

Cons of a Fixed-Rate Mortgage

• Typically has a higher initial interest rate than ARMs.

• Less flexibility if rates drop (unless you refinance).

Is a Fixed-Rate Mortgage Right For You?

A fixed-rate mortgage is the right choice if you need predictability in your monthly payment. Since your principal and interest amount stays consistent, it is easier to prepare your monthly budget. This type of mortgage also protects you from rising interest rates. You won't have to worry about what the mortgage market is doing since your rate will be locked in at the time of origination and will not change throughout the life of the loan. A fixed-rate mortgage is also best if you plan to stay in your home long-term. Long-term in the mortgage industry means at least 3 - 5 years. 

Adjustable-Rate Mortgages

An adjustable-rate mortgage features a variable interest rate that can change periodically, typically in relation to a benchmark index like the LIBOR, SOFR, or the U.S. Treasury rate.

Key Features of an Adjustable-Rate Mortgage

• Introductory Period: Offers a low fixed rate for an initial period (e.g., 5, 7, or 10 years).

• Adjustment Period: After the introductory period, the rate adjusts periodically (e.g., annually).

• Rate Caps: Limits on how much the rate can increase per adjustment and over the life of the loan.

Pros of an Adjustable-Rate Mortgage

• Lower initial interest rates than fixed-rate mortgages.

• Potential savings if interest rates stay low.

• May be ideal for short-term homeowners.

Cons of an Adjustable-Rate Mortgage

• Monthly payments can increase significantly after the initial period.

• More difficult to budget due to potential rate changes.

• Risk of higher long-term costs if rates rise.

Is an Adjustable-Rate Mortgage Right For You?

You should only take on an adjustable-rate mortgage if you are comfortable with some financial risk. Your interest rate is subject to movement in the market, so you could potentially be burdened with a high interest rate for an unknown period of time after your initial rate period ends. Even if you are comfortable taking on some financial risk, consider what you believe the market might do. If you believe interest rates will stay the same or drop, an adjustable-rate mortgage can be a good decision. Another reason you might decide to take on an adjustable-rate mortgage is if you expect to sell or refinance the home before the initial rate period ends. If this is your plan, you would never see any of the risk associated with an adjustable-rate mortgage.

How I Can Help You

When it comes time to purchase a home or refinance an existing loan, I want to help you! Hopefully articles like this give you good information and a better understanding of the mortgage world, but let me use my experience and expertise to help you with your particular situation.

I tell my clients and referral partners that a mortgage transaction starts with a simple conversation. Let’s talk about your financial situation, budget, and goals so that I can help you determine the best solution for you. During a 10-minute informal conversation, we can get you on the right path as it relates to a home purchase or mortgage refinance.