Fixed-Rate vs. Adjustable-Rate Mortgage: What’s the Difference?
The biggest difference between a fixed-rate mortgage and an adjustable-rate mortgage, aka an ARM, is that the interest rate on a fixed-rate mortgage never changes, while the rate on an ARM may go up or down periodically.
If you’re trying to decide between a fixed vs. adjustable rate-mortgage, it’s important to understand the advantages and disadvantages of both types of interest rates. Here’s a rundown of the major differences between the two:
Fixed-Rate vs. Adjustable-Rate Mortgages
|Fixed-rate mortgage||Adjustable-rate mortgage or ARM|
|Interest rate||– Based on market conditions and locked in when you take out the mortgage.|
– Stays the same for the life of the loan.
|– Starts off lower compared with the interest rate on a fixed-rate mortgage.|
– Adjusts periodically based on market conditions after the fixed period ends.
|Total interest paid||Determined at the start of the loan.||Could increase or decrease depending on how the interest rate adjusts.|
|Level of risk||Lower risk.||Higher risk.|
|Monthly payment||The principal and interest payments remain stable.||The principal and interest payments can fluctuate.|
|Popularity||More popular among homebuyers.||Less popular among homebuyers.|
|Makes sense if …||– You want no surprises in your monthly mortgage payment.|
– You can’t afford increases to your monthly payment.
– You plan to live in the same place for long time.
– Interest rates are low.
|– You’re confident you can afford any increases to your monthly mortgage payment.|
– You’re more concerned about short-term costs.
– You plan to sell your home soon, before the initial fixed period with the lower rate ends.
FAQ: Adjustable-Rate Mortgage vs. Fixed-Rate Mortgage
Here are the answers to some frequently asked questions about ARMs vs. fixed mortgages.
According to the Consumer Financial Protection Bureau, ARMs historically have been chosen by 25% to 30% of homebuyers. However, ARMs can increase in popularity when interest rates are high, since they offer lower initial rates than fixed-rate mortgages.
Well, borrowers need to meet eligibility requirements to get either an ARM or a fixed-rate mortgage. Lenders will examine:
– Your capacity to repay the loan, which includes your current income and recurring monthly debts.
– Your cash reserves and other sources of capital.
– The value of the property you’re buying.
– Your credit history and score.
ARMs and fixed-rate mortgages also offer the same loan terms — another term for repayment periods — including a 30-year term length.