Fixed Rate vs Adjustable Rate Mortgage: What’s the Difference?
Choosing a mortgage can be one of the most difficult decisions a homeowner has to make. There are so many mortgage options available, the process can seem rather intimidating.
Then, there is the issue of your rate. What is the difference between a fixed rate conventional loan versus an adjustable rate mortgage (ARM)? Which should you go with?
We are here to help. Keep reading for a brief guide on fixed rate vs adjustable rate mortgage.
In a fixed rate mortgage, your interest rate won’t change, no matter how much the market interest rates fluctuate. That gives you the peace of mind of knowing how much your mortgage payments will be every month for the life of the loan.
An adjustable rate mortgage, on the other hand, has an interest rate that can change. The most common type of adjustable rate mortgage is the 5/1 ARM, which has a fixed interest rate for the first five years of the loan and then adjusts every year after that.
What Are the Benefits?
The main benefit of a fixed rate mortgage is that you know exactly how much your mortgage payment will be every month.
This can make budgeting for your mortgage payment easier. With an ARM, your interest rate may be lower at the start of your loan, but it could increase over time.
On the other hand, an adjustable rate mortgage may start with a lower interest rate, but it has the potential to go up or down over time. This can be beneficial for borrowers who are looking to get the most bang for their buck and are comfortable with some uncertainty.
A fixed rate mortgage is a loan where the interest rate stays the same for the entire term of the loan. An adjustable rate mortgage is a loan where the interest rate can change, usually in response to changes in the market.
A fixed rate mortgage is ideal if you want to keep your monthly payments the same for the entire loan term. An adjustable rate mortgage may start out with lower monthly payments, but they can go up over time, which could make it more expensive in the long run.
View more info at Kingswood Mortgage to know about mortgages.
What Are the Risks?
The biggest risk with an ARM is that rates could increase dramatically, which would make your monthly payments unaffordable. If you plan to sell your home before the adjustment period, this may not be a concern.
But if you plan to stay in your home long-term, a fixed-rate mortgage may be a safer choice.
The Bottom Line
The bottom line is that a fixed rate mortgage is best for those who want predictability and stability, while an adjustable rate mortgage may be a better option for those who are comfortable with some degree of risk.
The bottom line is that with a fixed rate mortgage you know exactly what your monthly payment will be for the life of the loan while with an adjustable rate mortgage your monthly payment could go up or down depending on interest rate fluctuations.
Read and Learn Fixed Rate vs Adjustable Rate Mortgage
Whichever you choose, make sure you understand the terms and are comfortable with the risks involved between fixed rate vs adjustable rate mortgage. Speak with a financial advisor to learn more and get started on the path to homeownership.
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