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Adjustable-Rate Mortgages vs. Fixed-Rate Mortgages

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Buying a house is one of the most important financial decisions you can make. Owning a home will impact your finances for many years and can also help you build wealth. So understanding your options when it comes to choosing a mortgage is critically important when you’re considering buying a home. And it’s just as important when you’re considering re-financing – especially if you’re looking to take advantage of historically low interest rates before they start to edge back up.

There are two major types of mortgages that most people consider when purchasing or re-financing – fixed-rate mortgages and adjustable-rate mortgages (ARMs). And that’s why Consumers Credit Union offers a variety of both fixed-rate home loans and ARMs at competitive rates to meet your needs. Both options have pros and cons to consider. Learning more about both ARMs and fixed-rate mortgages can provide you with the information you need to choose the best home loan for your current needs and future goals – whether you’re buying your first home or refinancing to save money.

Check out our mortgage options and competitive rates. 

De-coding Mortgage Lingo

If you’re like most people, it may take a while to fully grasp or re-familiarize yourself with all of the terminology that comes with exploring options to finance or re-finance a home. So before we dive into the details you may want to review these simple definitions that can help you better understand common home loan jargon.

Quick Overview 

Fixed-rate mortgages maintain the same interest rate for the entirety of the loan, while ARMs start off with lower initial interest rates that will change over time after the introductory period of the loan. While many home buyers continue to be drawn toward the comfort and predictability that traditional 15-year or 30-year fixed-rate mortgages offer, it’s becoming clear that home loans, like so many other financial solutions, are not a one-size-fits-all proposition. In fact, with more and more adjustable-rate options to choose from, it’s very possible that you may be able to secure a lower initial interest rate and a term that's more suitable to your specific circumstances and objectives.

It’s All About the Interest

So what’s the biggest difference between an ARM and a fixed-rate mortgage? Basically, it all comes down to how the interest works. Fixed-rate mortgages have interest rates that are locked-in, which means the interest rate will never change over the full life of the loan. If interest rates go up, your rate will stay the same. And if interest rates go down, your rate will stay the same.

On the other hand, interest rates for ARMs are typically lower than fixed-rate mortgages at the beginning of the loan and then reset at specific, pre-determined intervals over the course of the loan’s term. This lower introductory interest rate is what can make ARMs a very powerful tool for home buyers or home refinancers with shorter-term goals in mind. That said, they do have their risks.

ARMs begin with a set interest rate for a specific period of time, then the rate can be adjusted periodically after that. In order to figure out how an ARM will adjust over time, all you have to do is look at its name. For example, a 10/1 ARM means your interest rate will be fixed for the first 10 years of the loan and can then be adjusted at one-year intervals thereafter. A 7/1 ARM means your interest rate will be fixed for the first 7 years of the loan and can then be adjusted at one-year intervals thereafter. A 10/6 ARM and 7/6 ARM means your interest rate will be fixed for the first 10 and 7 years and can then be adjusted at 6 months intervals thereafter. 

The most common ARM terms have initial fixed-rate periods of 5, 7 or 10 years. With ARMs, what’s important to remember is that while ARM interest rates start lower than fixed-rate mortgage rates, there’s always the possibility they will adjust higher several times during the entire life of the loan – and these periodic increases would increase your mortgage payment amounts.

Example: ARM vs. fixed-rate mortgage payments

7/1 ARM 30-year fixed rate mortgage
Mortgage amount: $400,000 Mortgage amount: $400,000
Interest rate: 3.0% Interest rate: 4.0%
Payment: $1,686
(After seven years this payment will reset every year, using a new interest rate that could increase.)
Payment: $1,910
(This payment will never change so long as you have the same mortgage.)

The Final Word

Generally, you may want to consider fixed-rate mortgages if you’re planning on staying in your home for 10+ years. With a locked-in rate, you’ll always know what your payment will be. Fixed-rate mortgages may be a great choice if you plan on staying put – or need mortgage payments that never change.

Adjustable-rate mortgages commonly have more appeal to people who are first-time homebuyers for a simple but very compelling reason – lower initial rates can help boost your buying power. If you’re on the hunt for your first home and think you may be moving in a few years into a bigger home, or if you are just interested in keeping your longer-term options open, ARMs can be an excellent choice. You'll get the benefit of a lower introductory rate as well as the flexibility to relocate, or even upgrade to a larger home, before your fixed-rate period ends.

Get More Information From One of Our Home Loan Experts

Interested in learning more? If you’re looking to purchase or re-finance a home, a great next step is to reach out to one of our home loan experts, who can provide additional information on ARMs and fixed-rate options for you.