Gabriel Lalonde
April 14, 2021

Fixed-Rate or Adjustable-Rate Mortgages?

When buying a new home, there are so many things to consider. Offers and counteroffers, remodeling, inspections… The list goes on, and the choice of a mortgage is definitely on it.

The appeal of a lower initial rate and lower payments of an adjustable rate mortgage (ARM) is hard to resist. But then there’s the certainty of a fixed rate. What’s better?

In many cases, the fixed-rate option could be the safer choice…

But choosing an ARM could save you money in some circumstances, too.

If you’re mortgage-shopping, look beyond specific rates and consider the big picture first. Here are a few questions to think about when choosing between a fixed-rate mortgage and an ARM.

How long will I own this house?

No one has a crystal ball. But if you think this will be your forever home, an ARM probably doesn’t make sense. It can offer a lower initial rate than a fixed mortgage … but then the rate will adjust. And most of the time, it will increase.

If you think you’ll grow out of the home or relocate in 5 years or so, an ARM might be a good choice. It keeps your monthly payments low for the first few years of your mortgage. Making monthly payments as if you had a higher rate builds equity in your home faster. And that will help when it comes time for your next move.

When will the rate adjust?

With a fixed-rate mortgage, the answer is easy: never.

But, as its name implies, an ARM rate will change. And there are many different types of ARMs.

The most popular version is called a 5/1. The rate will be fixed for the first five years. After that, it will adjust as often as once a year. Some ARMs adjust as quickly as one year or three years. Others don’t adjust for seven or even ten years. If you’re considering an adjustable rate mortgage, it’s important to know when its rate will adjust.

Is there a limit to my rate increase?

In many cases, there’s a cap to how high your ARM rate can increase.

Periodic caps limit how much your rate can rise within a set period (usually one year). A lifetime cap means that the rate can never rise above the total percentage cap. You must do the math on the worst-case scenario and evaluate whether you would be able to afford the maximum increase that would be allowed per the contract.

Most people only ever consider fixed-rate mortgages. In some situations, though, you may want to investigate an ARM.

Confused about the many mortgage options available? Give us a call! We can help you review your choices and make the best one for you.

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