What Are the Differences Between ARMs and Fixed-Rate Mortgages?

Published On: March 3, 2022|Categories: Blog, Buyers, Mortgages|Tags: Adjustable-Rate Mortgages, Buying, Fixed-Rate Mortgage, mortgage|

If you’re like most people buying a home for sale in Jasper, Huntingburg, Evansville or another Indiana community, you know you have a lot of options when it comes to mortgage products – and among them are fixed-rate mortgages and adjustable-rate mortgages, or ARMs. So what are the differences between ARMs and fixed-rate mortgages, and what’s right for you? This guide explains.

What Are the Differences Between Fixed-Rate Mortgages and ARMs?

There are two main types of mortgages: fixed-rate and adjustable-rate. You should talk to a financial professional before you decide which type of mortgage is right for you, but here’s a quick run-down on the differences between them.

Fixed-Rate Mortgages

In a fixed-rate mortgage, your interest rate stays the same for the life of your loan. If you take out a 30-year fixed-rate mortgage at 3.9 percent interest, that’s what your interest rate will be today, next year, and 29 years and 11 months from now. The only way to change your interest rate is to refinance your home – that is, take out a new mortgage.

The upside is that you always know what your monthly mortgage payments will be (not accounting for property tax, which can change and can affect your payments when your lender is involved). That way, you can budget accordingly.

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Adjustable-Rate Mortgages

An adjustable-rate mortgage has an interest rate that varies. Typically, you get a below-market interest rate; that means it’s lower than what most people are paying for fixed-rate mortgages.

The initial interest rate – the one you pay during your introductory period, which is usually 3, 5, 7 or 10 years – stays the same. After your introductory period, your interest rate will adjust based on current market conditions; it adjusts at specific intervals, so you’ll know when your interest rate is going to change.

Usually, there’s a cap on the amount of interest your lender can charge you on an adjustable-rate mortgage. Additionally, if you find that your interest rate gets too high, you may be able to refinance your loan and secure a lower interest rate.

How Do You Know Whether a Fixed-Rate or Adjustable-Rate Loan is Right for You?

The only way to tell what type of loan is right for you is to talk to a financial professional. You should consider:

How much money you have saved for a down payment
Whether you can afford to make mortgage payments if interest rates go up, which they’re likely to do
Whether you intend to live in the same home for a long time or you intend to sell it fairly quickly

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