Fixed vs. ARM

While finding the perfect home can be difficult enough, you also have to decide which type of mortgage rate is right for your new property and your specific needs. Your options are a fixed rate mortgage or an adjustable rate mortgage (ARM).    


Fixed Rate Mortgage

With a fixed rate mortgage, your interest rate and payment will remain the same for the duration of your loan. Some of the most important features of this type of mortgage include:

  • Unless the loan is altered, refinanced or paid off, the details of your loan will remain unchanged.
  • Even if the buy-down of the principal is sped up through extra payments, your payments will remain unchanged.

One advantage of a mortgage with an unchanging rate is that you have stable payments throughout the life of your loan. One disadvantage is that your rate will be the same even if the interest indices drop. It also important to know that on a fixed rate mortgage your principal reductions will not be taken into consideration for any future payments. The significance of this is that even if you make extra payments you won’t be able to lower your overall interest, nor will your monthly payments decrease.

Adjustable Rate Mortgage

With an adjustable rate mortgage, your interest rates can change based on the terms of your loan, which can fluctuate in a matter of months or years. Essential features include:

  • You’ll have an initial fixed rate (for a predetermined period of time)
  • The interest you pay is dictated by a predetermined point value
  • The first adjustment happens when the initial fixed rate period ends, and every adjustment after that is determined by future adjustment intervals based on your loan

Some of the great things about ARMs are that they often have a lower introductory rate and the decrease in your principle is reflected with every payment alteration. Disadvantages include instability and the possibility of your rates never being as low as they were when your loan first originated.

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