For those unfamiliar, fixed-rate mortgages (FRMs) are mortgages that have an interest rate that remains the same for the duration of the loan's term — typically 30 years. On the other hand, adjustable-rate mortgages (ARMs) have interest rates that can fluctuate over the life of the loan. There are pros and cons to both types of mortgages, as well as reasons why one might be preferable depending on individual borrowers' circumstances.
The main benefit of a 30-year fixed-rate mortgage is the stability it provides. Because the interest rate is locked in for the entire term, borrowers don't have to worry about their monthly payments increasing if interest rates rise. This makes it easier to budget for, as well as plan for the future. Additionally, the long loan term provides more time to pay off the loan while still having a relatively low monthly payment.
The downside to this type of mortgage is that the interest rate tends to be higher than it would be for an ARM. As the most popular mortgage option on the market today, lenders typically charge a premium for the security of the 30-year fixed mortgage. Furthermore, since the loan's rate and monthly payments stay the same, borrowers don't benefit from any decreases in the market rate, so they may end up paying more than necessary.
On the other hand, adjustable-rate mortgages offer several benefits over fixed-rate mortgages. Firstly, the initial interest rate is generally lower than a 30-year fixed mortgage, leading to lower monthly payments at the start of the loan. Furthermore, delicate fluctuations in the market rate can benefit borrowers: when the interest rate drops, so do the payments. This can help homeowners save money over the life of the loan.
However, ARM loans are not without risk. The monthly payments are subject to change as the interest rate fluctuates with the market. The adjustment frequency and caps limits the amount of change, but there is still a risk of payment shock if the rate goes up significantly. This can make it difficult to budget for the future, and in some cases, borrowers may even find themselves unable to cover their mortgage expenses.
Ultimately, the decision between a 30-year fixed vs ARM comes down to each individual's unique situation. For borrowers who prefer the security of knowing their payments will stay the same over the life of the loan, a 30-year fixed-rate mortgage might be the better option. On the other hand, those will a bit of risk tolerance who are looking to take advantage of a lower initial rate may prefer an adjustable-rate mortgage.
In summary, the debate between an ARM and a 30-year fixed mortgage is an important one for potential homeowners to consider. Both have their advantages and disadvantages; it is essential for each individual to weigh these carefully before deciding. While FRMs provide the peace of mind of stable, unchanging monthly payments, ARMs may offer a lower initial rate and the potential for savings if the market rate drops. It is ultimately up to the borrower to determine which option provides the best fit for them and their current financial needs.
This article was contributed on Sep 28, 2023