Fixed. vs. Adjustable Rate: What's the Difference?

When shopping for a mortgage, you'll likely encounter two types of loans: traditional fixed vs. adjustable-rate mortgages (ARMs). Both have their upsides and risks, so it's vital to understand the difference before deciding.

Here's what you need to know:

Fixed-Rate Mortgages

With this loan, your interest rate doesn't change during the life of the mortgage. As a result, your monthly payments won't change. Therefore, it will be easier to budget for your monthly mortgage payment.

The major upside of a fixed-rate mortgage is the stability it offers. You'll always know your mortgage payment, which can help you plan for the future. In addition, as inflation increases, the relative cost of each payment gets cheaper over time.

Furthermore, if mortgage interest rates rise in the future, you'll be protected against increases since your rate is locked in. On the other hand, the main risk of a fixed-rate mortgage is that you may pay higher interest rates over the loan's lifespan even if interest rates fall.

Additionally, fixed-rate mortgages typically have higher interest rates than ARMs, so you'll need to carefully weigh the total lifetime cost-benefit analysis before deciding between fixed vs. adjustable rates.

Adjustable-Rate Mortgages

An adjustable-rate mortgage (ARM) has an interest rate that can change over time. The initial interest rate is generally lower than a fixed-rate mortgage secured on the same date. However, it can increase (or decrease) periodically, typically once every year, usually reflecting overall debt-market conditions.

The main advantage of an ARM is that you'll usually start with a lower interest rate than you would with a fixed-rate mortgage. That can save you money in the short term and make your initial monthly payments more affordable.

However, since your interest rate can change with an ARM, it's difficult to predict your monthly payments down the road. That can make budgeting for your mortgage payment tricky over the loan's lifetime.

Another thing to consider is that if interest rates rise in the future, you'll be facing higher monthly payments since your interest rate will adjust accordingly. However, your loan will likely list an upper limit for interest rate increases.

This limit is known as the "cap," which can help protect you from large increases but doesn't protect you from small ones.

Which Loan Is Right for You?

The type of loan you choose should ultimately come down to your financial goals and personal preferences.

If you'd like the stability of knowing what your mortgage payment will be each month for the loan term, a fixed-rate mortgage may be the right choice for you. On the other hand, if you need a lower interest rate now and are comfortable with some uncertainty, an ARM may be the better option.

Whatever you decide, fixed or adjustable rate, compare offers from multiple lenders before choosing a loan. And remember, it's always advisable to speak with a financial advisor to get expert advice on the kind of loan that will be suitable for you.

Speak to a Mortgage Lender

If you're interested in learning more about fixed vs. adjustable rate mortgages, we can help.

MacAsh is a direct mortgage lender offering fixed-rate mortgages, adjustable-rate mortgages, jumbo loans, and alternate financing. We'll work with you one-on-one to find the right loan for your unique needs. Contact us today to get started or request rates.