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Westend61/Getty Images November 11, 2022 Kacie Goff is a personal finance and insurance writer with over seven years of experience covering personal and commercial coverage options. She writes for Bankrate, The Simple Dollar, NextAdvisor, Varo Money, Coverage, Best Credit Cards and more. She's covered a broad range of policy types — including less-talked-about coverages like wrap insurance and E&O — and she specializes in auto, homeowners and life insurance. Troy Segal is Bankrate's Senior Homeownership Editor, focusing on everything from upkeep and maintenance to building equity and enhancing value. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo Editorial integrity
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Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. When you get a mortgage, there are many loan features to consider. One of the key decisions is whether to go with a fixed- or . In today’s , adjustable -rate mortgages (ARMs) can be appealing due to their lower initial rates, but they have significant risk. Fixed-rate mortgages alleviate a lot of stress, but can mean paying more money. Each type of loan has pros and cons. Let’s compare and contrast adjustable-rate vs. fixed-rate mortgages. Fixed-rate vs adjustable rate mortgages
What is a fixed-rate mortgage
A has the same interest rate for the life of the loan. In other words, your monthly payment of principal and interest won’t change. (Note: your mortgage payments can fluctuate as your property taxes or homeowners insurance change over time, because those costs are usually wrapped into your loan payments in escrow.) These loans get their popularity from the predictability and stability they offer, but they can come with a higher interest rate than an ARM — at least at first. The most popular type of fixed-rate mortgage — in fact, the most popular mortgage, period — is the 30-year fixed-rate loan. At an interest rate of 7.26 percent with no money down, a $300,000, 30-year fixed loan will have monthly payments of around $2,048, not including insurance or taxes. Pros of a fixed-rate mortgage
Rates and payments remain constant. Monthly stability of payments makes household budgeting easier. Simple to understand, especially for . Cons of a fixed-rate mortgage
If interest rates fall, fixed-rate mortgage borrowers have to to take advantage. It could cost more in interest over the life of the loan if you secure the loan at a higher rate and you don’t refinance if rates drop. It is virtually identical from lender to lender and generally cannot be customized. What is an adjustable-rate mortgage
An , or ARM, is a home loan with an interest rate that can change periodically. This means that the monthly payments can go up or down throughout the life of the loan. Generally, the is lower than that of a comparable fixed-rate mortgage in the beginning. After the fixed-rate period ends, the interest rate on an ARM loan moves based on the index it’s tied to. The index is an interest rate set by market forces and published by a neutral party. There are many indexes, and your loan paperwork identifies which index a particular adjustable-rate mortgage follows.. The most popular adjustable-rate mortgage is the . The 5/1 ARM’s introductory rate lasts for five years. (That’s the “5” in 5/1.) After that, the interest rate can change once a year. (That’s the “1” in 5/1.) Some lenders also offer , and . At an interest rate of 5.53 percent, the monthly payment for the first five years on a $300,000 30-year 5/1 ARM would be around $1,709, not including taxes or insurance. Pros of an adjustable-rate mortgage
It has lower rates and payments early in the loan term. Because lenders can consider the lower payment when qualifying borrowers, people can buy more expensive homes than they otherwise could. It allows borrowers to take advantage of falling rates without refinancing. It can help borrowers save and invest more money. Someone who has a payment that’s $100 less with an ARM can put that money in a higher-yielding investment. It offers a cheaper way to for borrowers who don’t plan on living in one place for very long. Cons of an adjustable-rate mortgage
Rates and payments can rise significantly over the life of the loan. Some annual caps don’t apply to the initial loan adjustment. ARMs are more complex than their fixed-rate counterparts, including features like margins, caps and adjustment indexes. What s the difference between fixed-rate and adjustable-rate mortgages
ARMs and a fixed-rate mortgages come with some: The initial interest rate: An ARM typically has a lower initial interest rate than a fixed-rate loan. That means the monthly payment during the introductory period of an ARM is lower than the payment of a fixed-rate mortgage. The interest rate over time: After the ARM’s initial rate period, however, the rate and monthly payment can rise. Although there’s a limit to how much your rate can increase, it can still climb considerably, and you could wind up with an unaffordable monthly payment after the first few years of your loan term. A fixed-rate mortgage, by contrast, has a fixed payment throughout the life of the loan, and the rate and payment won’t change unless you refinance to a different loan. The down payment: ARMs generally require a slightly higher down payment of 5 percent. For some fixed-rate conventional loans, you can put down just 3 percent. If you don’t have much saved up, this might be your deciding factor when weighing fixed-rate vs. adjustable-rate mortgages. ARM vs fixed mortgage payments examples
5/1 ARM 30-year FRM Mortgage amount $300,000 $300,000 Interest rate 5.53% 7.26% Monthly payment $1,709 for first 5 years, then adjusts based on new rate $2,048 for 30 years ARM vs fixed Which should I choose
Now that you’ve got the ARM and fixed-rate mortgage basics, here are important questions to ask when . How long do you plan on staying in the home
If you’re going to be living in the house for only a few years, it can to take a lower-rate ARM, especially if you can get a reasonably priced 3/1 or 5/1. Your payment and rate will be lower, and you can build savings for a bigger home down the road. Plus, you’ll never be exposed to huge rate or payment adjustments because you’ll be moving before the adjustable-rate period begins. How frequently does the ARM adjust
After the initial fixed period, most ARMs adjust every year on the anniversary of the mortgage. The new rate is actually determined by the index value about 45 days before the anniversary, based on the specified index, but some adjust as frequently as every month. If that’s too much volatility for you, go with a fixed-rate mortgage. What s the interest rate environment like
When you’re weighing ARM vs. fixed, look at current interest rates. When rates are falling, borrowers have a decent chance of getting lower payments even if they don’t refinance. When rates are relatively low, however, fixed-rate mortgages make more sense. Rates are currently , so ARMs will be upfront, but you might see your payments grow massively once the rate lock expires. Can you still afford your payments if rates jump
ARM payments vary considerably and can change significantly from year to year as market conditions shift. On a $150,000 one-year adjustable-rate mortgage with 2/6 caps, your 5.75 percent ARM could rise to 11.75 percent, with the monthly payment shooting up as well. Experts say that when fixed mortgage rates are low, fixed mortgages tend to be a better deal than an ARM, even if you plan to stay in the house for only a few years. Final word on fixed- vs adjustable-rate mortgages
Adjustable-rate mortgages and fixed-rate mortgages are two ways to finance a home purchase. ARMs usually have lower initial payments, but those can rise after the initial rate period. This makes them ideal for people who plan to move or refinance their loan after a few years. Fixed-rate loans are typically more expensive upfront, but are more predictable in that your monthly payments don’t change. This makes them better for people who plan to stay in their new home , need stability in their budget or both. Overall, your decision about ARMs vs fixed-rated mortgages should be guided by your budget, your housing needs — and your appetite for financial risk. SHARE: Kacie Goff is a personal finance and insurance writer with over seven years of experience covering personal and commercial coverage options. She writes for Bankrate, The Simple Dollar, NextAdvisor, Varo Money, Coverage, Best Credit Cards and more. She's covered a broad range of policy types — including less-talked-about coverages like wrap insurance and E&O — and she specializes in auto, homeowners and life insurance. Troy Segal is Bankrate's Senior Homeownership Editor, focusing on everything from upkeep and maintenance to building equity and enhancing value. Related Articles