Each type has its own set of advantages and disadvantages that can be weighed depending on an individual's financial circumstances and goals.
A fixed rate mortgage provides stability as it has a steady repayment schedule and an unchanging interest rate, meaning payments remain the same throughout the entire term. The main downside to fixed rate mortgages is that they generally charge a higher rate of interest to cover this stability, thus increasing the overall cost of the loan. In addition, if interest rates decrease in the market, borrowers with fixed rate mortgages may not take advantage of these lower rates.
On the other hand, adjustable rate mortgages offer greater flexibility and potentially lower monthly payments than a fixed rate mortgage. With an ARM, the interest rate changes over the loan’s term, making it attractive for borrowers who expect their income to increase over time or who plan to move or refinance before the loan period ends. The downside to ARMs is that the interest rate is subject to periodic adjustment, meaning it could increase at any time. In addition, an ARM will likely come with a lower rate of interest than a fixed rate mortgage, but with no guarantee of how long the low rate will remain.
When deciding whether a fixed rate mortgage or an adjustable rate mortgage is the right choice, the first step is to decide how long you plan to stay in the home. Fixed rate mortgages provide borrowers with the security of having the same rate of interest for the entire loan term, so they are suitable for those who plan to remain in their home for an extended period. On the other hand, ARMs make sense for borrowers planning to sell or refinance within a few years, or who anticipate their income to grow significantly over the life of the loan.
The second factor to consider is the size of the loan. Fixed rate mortgages often have a higher total cost than ARMs, so they should be reserved for those taking out large loans. For smaller loans, the fluctuations in the interest rate may not make much of a difference in terms of total cost.
Finally, borrowers should assess their financial situation and decide if a fixed rate mortgage or ARM works best for them. If a borrower anticipates that their income will rise during the life of the loan, an adjustable rate mortgage may be the better option. However, if they expect their income to stay the same or drop during the life of the loan, a fixed rate mortgage may be the wiser choice.
In summary, fixed rate mortgages and adjustable rate mortgages both have their advantages and disadvantages. To decide which type is the best option for a particular loan, borrowers should consider their plans for staying in the home, the size of the loan, and their financial situation. With careful consideration, most borrowers can determine which type of mortgage is right for them.
This article was contributed on Oct 10, 2023
