Adjustable-Rate Mortgages (ARMs) versus Long-Term Fixed-Rate Mortgages
Without knowing the differences between ARMs and traditional mortgages, it can be difficult to decide which product is the best fit for you. Here are some pros and cons of each type to help shed some light on the topic.
Adjustable-Rate Mortgages (ARMs) have fallen out of favor over the past few years – and understandably so when you read about some of the complications that arose from these products. For example, ARMs with short fixed periods combined with prepayment penalties or ARMs that allowed for interest only (or even lower) payments, added quite a bit of stress to the market – especially when home values dropped.
Today, however, it might make sense to choose an Adjustable-Rate Mortgage, even with long term fixed rates as low as they are. The principal question (no pun intended) is how long do you intend to keep the mortgage?
If you anticipate remaining in the home for many years and have no plan to pay the principal down or off prior to maturity, then I would recommend a long-term fixed-rate mortgage, like the 30 year fixed. You’ll have the security of knowing your rate and payment will remain the same over the life of the loan. The downside, though, is that in order to take advantage of any future falling rates, you will have to refinance, which could mean thousands of dollars in closing costs.
If you plan to pay down your mortgage rapidly or plan on selling the home in the next 7-10 years, then I would recommend an ARM. The ARM offers an initial fixed period at a low interest rate. The mortgage note is often amortized over a 30-year period, so the payments are very affordable. After the initial fixed period, the rate will adjust on a set schedule. For example, MIDFLORIDA has rolled out a new 7/7 ARM product. The first number is the fixed rate period – 7 years. The second number is how often the rate can adjust thereafter – every 7 years.
In summary, an Adjustable-Rate Mortgage provides a lower rate, lower payment, and more flexibility; whereas a fixed-rate mortgage offers predictable payments, protection from rate increases and simplicity. So, ask yourself these questions when choosing a mortgage:
- How long will you stay in the home?
- How low are current fixed-rate mortgages?
- How comfortable are you with the uncertainty of rising rates?
- How often will the ARM adjust? And is there a cap on how high the rate can increase?
If you need more information or assistance on deciding which mortgage is best for you, contact your local mortgage originator.
I’ve helped individuals meet their financial goals for more than 12 years. I’m committed to helping our members find the right mortgage product to meet their needs and make their dreams of homeownership a reality.
Sterling Grubbs, Senior Vice President
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