Many things about purchasing your first home can be confusing. In particular deciding if a fixed-rate mortgage or an adjustable-rate mortgage is right for you. The first step in choosing is understand what each is and the differences between them. A fixed-rate mortgage in general means you can get an interest rate on your mortgage from a lender and expect it not to change over the duration of your loan. Usually fixed-rate mortgages are structured around a payment period of 30 years. However, you can choose a period of 15 or 20 years instead if you wish to pay off your home in a shorter time frame. Fixed-rate mortgages are popular and widely used because of their predictability and the ease that lends to budgeting finances monthly. Additionally, a borrower of a fixed-rate mortgage can be assured that if interest rates go up their interest rate and monthly mortgage will not. In contrast if interest rates go down a holder of a fixed-rate loan will need to refinance their loan in order to take advantage of the lower interest rates available.

Adjustable-rate mortgages otherwise known as ARMs have an interest rate the borrower can expect to change over the lifetime of their loan. They have an initial fixed-rate period when the loan is issued where the monthly payment is typically lower for the first few years. After this period the monthly payment can rise as the percentage of interest changes (usually increasing). Borrowers of this type of loan should be advised to ensure they have a Truth in Lending disclosure from the lender they choose. It will outline the maximum amount their payment monthly can reach. Knowing this in advance is optimal in ensuring a borrower doesn’t wind up in a situation where their monthly payment excessively exceeds what they can afford to pay if the interest rates rise. On the flipside if interest rate drop at any point during the loan the monthly payment due will follow suit and also drop. As with the maximum monthly payment being capped for the loan most lenders can also expect the minimum monthly payment amount to also have a lower threshold it will not go below.

When choosing in between the two options it is advisable to consider your monthly budget as well as to take in consideration how long you plan to stay in the home. If a borrower is only planning to stay in the home for less than five years an adjustable-rate mortgage could likely be the most beneficial choice. If the borrower is planning to stay in the home more than five years it is usually advised that they, like the majority of other borrowers do, choose a fixed-rate mortgage. This is especially true if interest rates at the time of the loan are at a very low mark historically.

Key Points:

  • 1ARM mortgages are where the interest rate is set for a few years then can adjust upwards.
  • 2It is important to consider how long you will be in the home you are purchasing to choose the correct type of loan.
  • 3Many home loans are for 30 years but there are shorter options to consider.

Fixed-rate mortgages are usually the better choice for most people.