What Sets Fixed-Rate Mortgages Apart from Adjustable-Rate Mortgages?

finance

Before you begin house hunting, it's crucial to understand your financing options, especially the differences between fixed-rate and adjustable-rate mortgages (ARMs). Each type has its own advantages and drawbacks, and the best choice for you depends on how long you plan to stay in your home and your monthly budget. Let’s explore these differences in detail.

What is a Fixed-Rate Mortgage?

A fixed-rate mortgage is exactly what it sounds like: your interest rate remains constant throughout the life of the loan. This means you’ll have a consistent monthly payment, whether your loan term is 15, 20, or 30 years. The length of the loan affects your monthly payment amount, total interest paid, equity buildup, and the time it takes to pay off the loan. Generally, longer-term loans have lower monthly payments but accrue more interest over time and take longer to build equity and pay off. Conversely, shorter-term loans have higher monthly payments but result in less total interest, quicker equity buildup, and faster repayment.

Is a Fixed-Rate Mortgage the Right Choice for You?

A fixed-rate mortgage can be a good option if you plan to stay in your home for a long time, such as over 10 years. It's also a solid choice for first-time homebuyers, offering the benefit of predictable monthly payments and peace of mind, since your payment remains consistent even if interest rates increase. However, a potential downside is that if interest rates are high when you apply for the loan, qualifying might be more challenging due to the higher monthly payments.

What is an Adjustable-Rate Mortgage?

An adjustable-rate mortgage (ARM) starts with a lower interest rate and monthly payment for the initial five to ten years compared to a fixed-rate mortgage. During this period, your rate and payments can be locked in. After this initial phase, the interest rate adjusts based on market conditions, which can lead to higher monthly payments. However, ARMs typically have caps that limit how much your interest rate can increase or decrease during a single adjustment period and over the life of the loan.

Is an Adjustable-Rate Mortgage Right for You?

An ARM might be suitable if you plan to move within a few years, as it offers lower initial rates and payments compared to a fixed-rate mortgage. Keep in mind, though, that you may need to make a larger down payment and have a strong credit history to qualify.

Is One Better than the Other?

It depends on your circumstances! If you plan to stay in your home long term, a fixed-rate mortgage might be the best option. However, if you're only planning to stay for a few years and have the financial means and credit to qualify for an ARM, it could be a more cost-effective choice due to lower initial payments. But how do these options compare financially?

Use our mortgage calculator to see how much you could save or spend over a 30-year fixed-rate loan. Our Mortgage Required Income Calculator can also help you determine the income needed to afford a $300,000 home or any home you have in mind.

Conclusion

Fixed-rate or adjustable-rate mortgage? We've covered the basics: fixed payments over the long term versus a lower rate and bigger down payment for a shorter-term loan. For personalized advice and to decide which option is best for you, contact Capital Bank. The more informed you are, the better financial decision you can make.