Adjustable-Rate Mortgages vs. Fixed-Rate Mortgages
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.
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.
It’s All About the Interest
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%|
(After seven years this payment will reset every year, using a new interest rate that could increase.)
(This payment will never change so long as you have the same mortgage.)
The Final Word
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.