There are two rate-based mortgage options you can select from when determining which home financing option is best for you: fixed rate mortgage and adjustable rate mortgage.
Fixed Rate Mortgages provide the peace of mind of knowing exactly what your rate will be for the entire term of your loan – a great option if you’re planning on owning the property long term. With a fixed-rate mortgage, there is no risk of your rate rising, even if general market interest rates do rise.
Adjustable Rate Mortgages (ARM for short) are initially lower than fixed-rate loans. Using an adjustable rate mortgage does expose you to the risk that interest rates could increase and drive up your monthly payments.
There are two types of ARM loan programs to be aware of: the ‘Fully Amortizing’ and the ‘Interest Only’.
- Fully Amortizing: with this type of ARM you make a monthly payment based on a schedule that will pay off the entire mortgage balance at the end of your loan term. Common Fully Amortizing ARMs include 10/1 (10 years at a fixed rate, then the rate adjusts each year after that), 7/1 (7 years at a fixed rate, then the rate adjusts each year after that) and 5/1 (5 years at a fixed rate, then the rate adjusts each year after that).
- Interest Only: as the name implies, with this ARM option, you are only required to make monthly interest payments which can lower your overall monthly mortgage payment. During this time though, your mortgage’s principal does not decrease, which leaves you the loan’s outstanding principal sum to repay at the end of your mortgage’s term (referred to as a balloon payment.)
While the rate can change annually after your fixed-rate time period has ended, there is usually a maximum rate that cannot be exceeded during the adjustable time frame. ARMs can be a good deal if you know you’re going to stay in your home for a relatively short period of time.
Take a moment to consider these factors when deciding if you should choose a fixed or adjustable rate mortgage to finance your home:
- How long you plan to stay in your home
- The general interest-rate outlook
- Your overall home budget
- Your tolerance for risk
Not sure what the best rate option is for you? Let your experienced loan officer help review the options as they align with your unique homeownership goals and financing situation.