One of the questions you might encounter from your mortgage loan officer is whether you would prefer a fixed-rate mortgage or an adjustable-rate mortgage (ARM). Before you rush into choosing one or the other, though, you should make sure you fully understand the differences with each type, and here are some of the key differences to compare.
The length of time the interest rate lasts
The biggest difference between a fixed-rate mortgage and an ARM is the length of time the interest rate remains the same. When your mortgage has a fixed rate, it means that the interest rate will always be the same rate and will never change for as long as you have the mortgage. If you choose a 30-year loan, the interest rate will stay the same for the full 30 years if you keep this mortgage for the entire time period.
With an ARM, your interest rate will not stay the same forever. Instead, you will have an interest rate that is subject to change, and you will know exactly when it could change. This might be in five years or it could be longer, but at some point, the lender will have the right to change the rate. If you take a 30-year ARM and keep it for the full 30 years, your interest rate may change many times during this 30-year period.
The interest rate
Because there is some risk involved with getting an ARM, you should understand that you will likely be able to get a lower interest rate from an ARM when compared to a fixed-rate mortgage. In other words, if you want to save the most money now, choosing an ARM will likely give you this benefit, as the rate will likely be lower. The only problem with this is that the rate could end up increasing a lot over time, whereas you would not have this risk when taking out a fixed-rate loan.
The time you plan to own the house matters
The other thing to understand is that you should consider how long you plan on staying in the home when choosing which type of loan to get. If you plan on living there for 30 years, you would probably be better off with a fixed-rate loan, whereas an ARM might be better for you if you only plan on living there for five years or so.
You could talk to a loan officer to learn more about both options before you decide which one is better for you.Share