Adjustable Rate Mortgage (ARM) VS Fixed Rate Mortgage
With over 23 years of experience in the mortgage industry, our Mortgage Lending Manager Mark Isquith's philosophy is that every member should have the best experience when buying or refinancing a home. Here, Mark shares his expertise on two popular home loan options to help you find the one that fits your unique needs.
Understanding the Difference
- A Fixed-Rate Mortgage keeps the same fixed principle and interest payment for the life of the loan.
- An Adjustable-Rate Mortgage (ARM) will generally start at a predetermined interest rate that will most likely be lower than a fixed-rate mortgage.
These loans are similar in that both mortgage loans are amortized over 30 years. But it is important to note that the ARM interest and monthly payments might increase after the fixed-rate period ends.
The fixed-rate period can be 3,5,7,10 or even 15 years. When looking at rates you can tell the difference between these options because they will be advertised as 3/1 or 5/1 or 7/1 or 10/1 and in our case, we also offer a 15/15 ARM. The first number represents the number of years the fixed rate will last. After that fixed period ends, the interest rate can change on a schedule of the number of years indicated by the second number.
- For example, a 10/1 ARM would be at a fixed rate for 10 years. Starting on year 11 of the loan, your interest rate and monthly payments could change annually.
- Our 15/15 ARM remains at a fixed rate for 15 years. At the 16th year, your one-time adjustment will happen and could affect your interest rate and monthly payment.
Determining Which Home Loan is Right for You
There are a few advantages of an ARM, especially in our current economic environment. The first is that you can qualify for a higher balance loan because your ARM payments will be lower.
- This can help you meet lenders' debt-to-income ratio standards, which is the percentage of your income being used to pay down your debt. As you consider buying or refinancing, keep in mind that overall, no more than 28% of your income, after your other debt payments, should go to a monthly mortgage payment.
- Another advantage of an ARM is that if you don't plan to be in your home for a long time, you can save monthly in the short term. This upfront savings for the first few years of your loan can be ideal if you plan to move within a few years or refinance quickly.
- It is important to know that there is no Private Mortgage Insurance (PMI) on our ARM loans over 80% loan-to-value for your primary residence. Compared to a loan with PMI, your monthly savings could add up.
The advantage of a Fixed Rate Mortgage is your interest rate and monthly payments remain the same over the life of the loan.
- In a low-rate environment, you'll have the opportunity to lock in a low rate for 30 years.
- Another advantage of a Fixed Rate Mortgage is if you are not comfortable with a possible rate change, you will have a fixed payment over the life of the loan.
Both of these loans could be a great option for you. Schedule an appointment and let us help you find the best home loan option.