Author: Williams Brown

Are you considering the best mortgage route to follow? Should you go with an ARM plan or get a fixed-rate mortgage?

This article will explain the two primary mortgage types and why going with an ARM may be better than you think.

Let’s get started!

Top Reasons ARMs Are Usually Better Than Fixed-Rate Mortgages

Overview

Adjustable-rate mortgages (ARMs) and fixed-rate mortgages are the primary mortgage types. 

While several variations of both categories exist, the first step in your home-seeking journey should be understanding which loan types best match your financial position.

Simply put, the chief differences between the mortgage categories are:

• The agreed interest rate on fixed-rate mortgages remains the same over the loan’s duration. While the agreed rate of interest of adjustable-rate mortgages rises (and rarely lowers) over the loan’s course.
• Monthly repayments on fixed-rate mortgages are protected from unexpected mortgage rate changes. While monthly repayments on adjustable-rate mortgages make it hard for lenders to budget safely.
• Fixed-rate mortgages are difficult to qualify for when interest rates spike. While adjustable-rate mortgages are typically cheaper in the initial 3-7 year repayment period.

Now you understand the main differences between them, let’s move to understanding the loan types on a fundamental level.

What Are ARM Mortgages?

An adjustable-rate mortgage charges a variable rate of interest that changes throughout the loan’s duration. 

As the loan’s term runs, the interest rate rises. The initial interest rate set on an ARM is lower than the market rate on a fixed-rate property with comparable value.

When managed wrongly, an ARM’s interest rate will surpass a fixed-rate loan’s going rate.

Adjustable-rate mortgages retain the initial interest rate for a fixed period. After this, the loan’s interest rate rises at an agreed frequency. This fixed-rate period varies significantly by borrowers – usually anywhere from one month to ten years.

Once the initial interest term expires, the loan resets, then a new interest term calculated with the current market rates begins. That period exists, obviously, until the next pre-arranged rate reset.

What Are Fixed-Rate Mortgages?

A fixed-rate mortgage imposes a pre-arranged interest rate that stays the same throughout the loan’s duration. Even though the principal and interest you pay each month vary from payment to payment, your total repayments remain the same.

The best thing about fixed-rate loans is they’re easy to understand, and your total repayment remains unchanged throughout the loan’s life. That makes budgeting easier and protects borrowers from significant increases in monthly payments in the event of an interest rate spike.

However, qualifying for this mortgage type is more difficult because when interest rates surge, payments become less affordable.

So Which Is Better?

Now you’ve got a basic understanding of the two mortgage types, it’s time to answer the question: 

Adjustable-rate mortgages vs. fixed-rate mortgages: which is the better option for you?

I will explain why an ARM is the better pick in the three points.

ARMs Are Easier To Qualify For

Adjustable-rate mortgages are easier to qualify for than fixed-rate mortgages. 

That’s because interest rates on this loan type are lower, which means your monthly payments are lower.

ARMs Offer Lower Initial Interest Rates

The introductory interest rate on an ARM is lower than on an equivalent fixed-rate mortgage. That’s because borrowers bear more risk when taking an ARM, as interest rates may rise over time. 

Consequently, borrowers receive a lower introductory rate when initially taking a loan.

ARMs Allow You to Use Lower Interest Rates To Your Advantage

Interest rates are up 3% in 2022, the highest rise ever since the 1981-1982 recession. If you obtain an ARM now and interest rates fall, later on, you can use the lower interest rates without needing to refinance your loan. 

However, if interest rates rose further, you’d be left with higher monthly payments. For this reason, you should seek counsel from your financial manager before taking on any mortgage type.

Conclusion

Regardless of the mortgage type you select, writing a loan you can bear will require you to thoroughly analyze all your mortgage options against your current financial status.

Consult a financial advisor to consider how fixed-rate and adjustable-rate mortgages may work with your situation.