Are Fixed Rate Mortgages or Adjustable Rate Mortgages better for me?

Are Fixed Rate Mortgages or Adjustable Rate Mortgages better for me?

August 15th, 2018 | Purchasing a Home, Fixed Rate Mortgages, Adjustable Rate Mortgages, Refinancing a Home

When you are in the market for a mortgage, one of the many decisions you’ll have to make is whether to apply for a fixed-rate loan or an adjustable rate mortgage (ARM). Both can be beneficial, depending on your situation. Learning the difference between them can ensure you get the right product for your financial goals.

Fixed-Rate Mortgages

Fixed-rate mortgages (FRMs) are just as their name suggests - loan with a fixed interest rate, a rate that never changes over the course of the mortgage. The obvious benefit of this type of loan is that your monthly payment, as well as your interest costs, will be predictable and therefore easier to plan into your budget. The interest rate on an FRM will be determined by several factors including the overall market rates, your personal credit history and the size of your down payment.

FRMs are a great choice for those who are ready to settle down and plan to stay in their new home for years and even decades to come. They are also a smart choice when mortgage interest rates are low by historical standards. Locking in a low rate can save you thousands of dollars over the life of the loan.

ARM Loans

An adjustable rate mortgage starts out with a low interest rate for a set period of time, after which the rate can fluctuate. The initial rate can sometimes be lower than an FRM by as much as one percentage point. One of the most popular types of ARM loans is the “5/1” ARM. The “5” means that the initial low rate will be fixed for the first five years and the “1” means that the rate will be allowed to reset every year thereafter.

While the mortgage rate you get on an ARM is still based on your credit and down payment, the adjustments will be closely tied to a specified market index. This could be a public interest rate such as LIBOR (the London Inter-Bank Offer Rate) or it could be a private interest rate formula developed by your lender. If the index rates are moving higher, your interest rate will climb, but if the index falls your interest rate could actually decrease. The risk with ARM loans, though, is that when your mortgage is in the resetting phase, market interest rates might jump up dramatically, pushing your mortgage payments higher than you can afford.

However, for the savvy mortgage borrower, ARM loans can be a great boon. They can be an excellent choice for those who do not plan to stay in their current home for more than a few years. In this case you could take advantage of the super low initial rate and sell your home before the rate is allowed to reset higher. ARMs can also be helpful for first-time buyers because it often easier to qualify for an adjustable rate mortgage rather than a fixed-rate one. This could give a novice buyer the ability to afford more house than they otherwise could. ARM borrowers should just make sure that they have the income to cover higher monthly mortgage payments if they keep the loan past the initial fixed-rate period.

In the end, the difference between ARMs and FRMs may come down to personal preference. Some buyers will prefer the stability of a fixed interest rate while others will be excited to save some money upfront and possibly have more flexibility for relocation. Both can save you money, depending on how high current market rates are.

If you would like to talk to a mortgage professional about Fixed versus Adjustable Rate Mortgages? Give Holmgren and Associates a call today at 510-339-2121 and we can go over both programs in greater detail and even give you a free no obligation quote for both programs.


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Holmgren and Associates

DBA of Finance of America
4200 Broadway
Oakland, California 94611
Phone: 510-339-2121
NMLS 0910184/1071

Holmgren & Associates is a branch of Finance of America. We are a full service mortgage banker with an experienced staff offering expertise in residential mortgage lending, with primary focus on loans for home purchase, refinance, and reverse mortgages.

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This is not a commitment to lend. Prices, guidelines and minimum requirements are subject to change without notice. Some products may not be available in all states.  Subject to review of credit and/or collateral; not all applicants will qualify for financing. It is important to make an informed decision when selecting and using a loan product; make sure to compare loan types when making a financing decision.  Any materials were not provided by HUD or FHA. It has not been approved by FHA or any Government Agency.  A preapproval is not a loan approval, rate lock, guarantee or commitment to lend. An underwriter must review and approve a complete loan application after you are preapproved in order to obtain financing.  Questions, comments, concerns? Send to