Fixed-rate mortgages have been the standard for American homebuyers for years. But with the 2022 interest rate hikes, today’s buyers are wondering if an adjustable-rate mortgage (ARM) is a better fit for the current market.
In this article, we’ll look at fixed-rate vs. adjustable-rate mortgages to help you decide which is the better option for you.
WHAT IS A FIXED-RATE MORTGAGE?
A fixed-rate mortgage is a home loan in which the interest rate is locked in for the term of the loan. For example, if you get a 30-year fixed-rate mortgage with a 7% interest rate, your rate will remain 7% until your loan is either paid in full or refinanced, regardless of changes in going market rates.
BENEFITS OF A FIXED-RATE MORTGAGE
The primary benefit of a fixed-rate mortgage is stability. Since your rate stays the same, you won’t see any unexpected rate hikes that could cause your mortgage payments to jump. This makes budgeting easier since you know how much your principal and interest payments will be through the entire term of your loan. It also means that the risk associated with changing interest rates is transferred from you to your lender. If interest rates go up, you keep your lower interest rate, regardless of the rates the lender is charging new borrowers.
CONS OF A FIXED-RATE MORTGAGE
The downside of a fixed-rate mortgage is that your initial rate could be higher with a fixed rate than what you would pay on an adjustable rate. There is also a chance that rates could go down, leaving you locked in at a higher rate. However, as long as you maintain solid credit, income, and debt levels, you should be able to refinance your loan to get lower going rates if they do go down in the future.
WHAT IS AN ADJUSTABLE-RATE MORTGAGE?
An adjustable-rate mortgage is a home loan in which the interest rate fluctuates with the going market rate.
In most cases, you will have an initial fixed-rate period (five years, for example) in which the rate doesn’t change. But after that period, the rate can go up and down.
PROS OF AN ARM
There are two main benefits of ARMs:
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If interest rates go down, your rate will automatically be adjusted; you won’t need to do anything to get the lower rate.
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The introductory rate is typically lower for an ARM than for a fixed-rate loan.
CONS OF AN ARM
The potential downside to an ARM is that your rate would go up if market rates increase. This would mean a sudden increase in your monthly mortgage payments. And, depending on the severity of the rate change, the payment increase could be steep. This can make it difficult to budget accurately.
Are You Looking to Buy?
If you’re in the market for a new home, the experienced team here at Sequoia Real Estate is excited to help! We can help you find your dream home and connect you with a reputable lender who can guide you on the right type of mortgage for your unique situation. Contact us today for a friendly, free consultation!
