Fixed Rate Mortgage vs Adjustable Rate Mortgage: The Differences
Are you trying to decide between a fixed rate mortgage vs adjustable rate mortgage? You are not alone. Up to 70% of borrowers switch from a fixed mortgage to an adjustable mortgage in their mortgage loan.
To make sure that you are making a sound financial decision. Before continuing, it’s necessary to know the differences between fixed and adjustable mortgages.
Let’s take a deeper dive into each type of loan and help you decide which is the best fit for your unique financial situation.
Fixed Rate Mortgage
A Fixed Rate Mortgage is a mortgage where the interest rate is fixed for the duration of the loan. This type of mortgage is good for people who want to know what their monthly mortgage payment will be, as it will not fluctuate with changes in the market.
Adjustable Rate Mortgage
An adjustable rate mortgage is a loan where the interest rate is not fixed, but instead is adjusted periodically according to a pre-selected index. This type of mortgage usually has a lower interest rate than a fixed rate mortgage, but the payments can go up or down as the index changes.
Adjustable rate mortgages are often used by borrowers who expect their incomes to increase in time, or who plan to sell their homes before the end of the loan term.
The Benefits of a Fixed Rate Mortgage
Your interest rate will never change. That means your monthly payments will always be the same, making it easy to budget for your housing costs. But, because they fix your interest rate you may end up paying more in interest over the life of the loan if interest rates go down.
The Benefits of an Adjustable Rate Mortgage
An adjustable rate mortgage is a type of mortgage that has an interest rate that is adjusted periodically. This type of mortgage is often a good choice for borrowers who plan to sell their home or refinance within a few years, as it usually offers a lower interest rate than a fixed-rate mortgage.
The Differences Between Fixed Rate Mortgage vs Adjustable Rate Mortgage
The significant difference between these two types of loans is the risk involved. With a 15-year fixed rate mortgage, the borrower knows exactly how much their monthly payments will be for the loan. This predictability can make budgeting easier and give the borrower peace of mind.
An adjustable-rate mortgage also involves more risk. The interest rate on these loans can change over time, which means the monthly payments can also go up or down. This can make budgeting more difficult. And can cause financial stress if the payments increase.
Fixed-rate mortgages are the safest option for borrowers. But, they usually come with higher interest rates than adjustable-rate mortgages. So, it is important to weigh the pros and cons of each option before deciding.
Choose What Is Best for You
Assuming you are in the market for a new home and are considering either a fixed rate mortgage vs adjustable rate mortgage. It’s important to understand the key differences between the two and then decide.
A fixed-rate mortgage offers a locked-in interest rate for the life of the loan. While an adjustable-rate mortgage starts with a lower interest rate that can increase or decrease overnight.
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