The Difference Between Fixed and Adjustable Rate Mortgages

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Are you racking your brain trying to decide between a fixed rate and adjustable rate mortgage? You are not alone. Almost every homebuyer struggles with this same dilemma. While there are many pros and cons to consider, it’s important to first have a clear understanding of the differences between the two types of loans.

Fixed Rate Mortgage

A fixed rate mortgage’s interest rate is set when you take out the loan and will never change. While property taxes or insurance premiums may increase, your monthly mortgage payment will not – allowing you to plan and budget your expenses accordingly. Fixed rate mortgages are especially good for locking in low interest rates like the ones we’re seeing now, but they are often higher than the initial rate of an adjusted rate mortgage.

Questions to ask your loan advisor about fixed rate mortgages:

  • What is the term of this loan?
  • How much will your monthly payment be?
  • Does this loan meet your needs?

Adjustable Rate Mortgage

An adjustable rate mortgage’s interest rate is likely to fluctuate during the loan’s lifetime. Initially, ARMs typically have a lower interest rate than fixed rate mortgages. But, once the introductory period is over, interest rates will unlock, adjust to an outside index and the amount you pay monthly could increase.

When you’re looking at different loan options, you will see ARMs listed as 1/1, 3/1, 5/1, etc. The first number shows how long the initial interest rate will last. The second number indicates how often the rate will adjust. For instance, a 3/1 ARM will have the initial rate for three years, then adjust annually from then on. To ensure your monthly payment does not skyrocket or plummet, most ARMs have caps that restrict the rate from going too high or too low.

Before taking out an ARM, ask:

  • How high can your interest rate and monthly payments change with each adjustment?
  • How frequently could your interest rate adjust?
  • How soon can your payment change?
  • Is there a cap on how high or low your interest rates can go?
  • Will you be able to afford the loan if the interest rate and monthly payment increase to the maximum cost defined in the mortgage agreement?
  • Does this loan meet your needs?

Still feeling lost? Feel free to contact our trusted RPM loan advisors. They are happy to answer any of your questions regarding the fixed and adjustable rate mortgages RPM offers.

By Kendall Taylor