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Increasing Interest Rates - ARM or FIXED?


When it comes to buying a home, one of the biggest decisions you'll have to make is whether to get an adjustable-rate mortgage (ARM) or a fixed-rate mortgage. Both types of mortgages have their pros and cons, so it's important to understand what each one offers before you make a decision.


ARM vs Fixed Rate Mortgage: What's the Difference?

The primary difference between an ARM and a fixed-rate mortgage is the interest rate. With a fixed-rate mortgage, the interest rate remains the same throughout the life of the loan. This means that your monthly payments will remain the same as well, making it easier to budget for your mortgage expenses.


An ARM, on the other hand, has an interest rate that can change over time. The initial interest rate is usually lower than the rate on a fixed-rate mortgage, which can make it more attractive to borrowers. However, the rate on an ARM is tied to a benchmark index, such as the London Interbank Offered Rate (LIBOR) or the prime rate. If the index rate goes up, your interest rate and monthly payment will also go up. If the index rate goes down, your interest rate and monthly payment will go down as well.


Which Option Is Best for You?

The answer to this question depends on a few factors, such as your financial situation, your future plans, and your risk tolerance. Here are some things to consider:


How long do you plan to stay in your home?

If you plan to stay in your home for a long time, a fixed-rate mortgage may be the better option. This way, you won't have to worry about your monthly payment increasing over time. If you plan to move in a few years, an ARM could be a good option since you'll likely sell your home before the interest rate has a chance to rise significantly.


Can you afford a higher monthly payment?

If you can afford a higher monthly payment, an ARM could be a good option. This is because the initial interest rate on an ARM is usually lower than the rate on a fixed-rate mortgage, which means your initial monthly payment will be lower as well. However, keep in mind that the rate and payment could increase in the future.


How much risk are you willing to take?

If you're risk-averse, a fixed-rate mortgage may be the better option. With a fixed rate, you know exactly what your monthly payment will be for the life of the loan. If you're comfortable with some risk, an ARM could be a good option since it has the potential to save you money on interest in the short term.


Do you think interest rates will go up or down in the future?

If you think interest rates will go up in the future, a fixed-rate mortgage may be the better option. This way, you won't have to worry about your monthly payment increasing as interest rates rise. If you think interest rates will stay the same or go down, an ARM could be a good option since you could save money on interest in the short term.


Conclusion

Choosing between an ARM and a fixed-rate mortgage can be a difficult decision, but it's important to choose the option that's best for your financial situation and goals. If you're still unsure which option is right for you, consider speaking with a mortgage professional who can help you weigh the pros and cons of each option and make an informed decision.


As a realtor, I have access to mortgage brokers that will be able to assist you making the right decision. It is always a good idea to start with your banker where you bank with. And if you feel like exploring more options, do not hesitate to contact me, and I will be glad to connect you with the right resources.

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