Should you get a fixed rate mortgage or an adjustable rate mortgage (ARM?) Even though most people go the fixed rate route, there are pros and cons to both. Here are a few things to think about as you make your decision.
Pros and Cons of a Fixed Rate Mortgage
Like the name implies, a fixed rate mortgage is one where the interest rate is set in stone. It won’t go up or down with the market. This can be a good thing if you’re in an environment where the rate keeps rising. But in some environments – like the one we’ve found ourselves in over the last 8 months – it can be seen as a negative. Rates got lower, and people with existing fixed rate mortgages weren’t able to take advantage of those lower rates unless they refinanced.
Budgeting tends to be easier with this type of mortgage, because you know your payments will never change. You’ll be paying the same amount next month as you are 10 years from now. And since you will (hopefully) be making more money in the future, payments will actually be easier to make as time goes on.
Something else to think about is when interest rates are high, a fixed rate mortgage seems less attractive. Your monthly payments on the loan will be high, hence why that kind of environment seems to point people towards an ARM.
Pros and Cons of an Adjustable Rate Mortgage
ARMs got a bad reputation after the 2008 financial crisis. The problem was a lot of people who shouldn’t have qualified for big loans were getting them anyways, and many of the loans were ARMs. They may have been able to make the initial payments, but a rising interest rate on a large mortgage will change the monthly payments quickly.
That’s the biggest downside with these. As interest rates rise, you end up paying more. It makes budgeting harder to do compared to a fixed rate loan.
But these loans exist for a reason. The initial interest rate on an ARM will be lower than what you’d get on a fixed rate mortgage. That can be a big deal when interest rates are high. We aren’t in that kind of environment right now, but who knows what the future holds.
ARMs also tend to be more complicated than fixed rate mortgages.
Should You Get a Fixed Rate or Adjustable Rate Mortgage?
That’s up to you. In our current environment, we generally recommend a fixed rate mortgage for three reasons.
- Interest rates are low, so you are getting a great deal
- Interest rates won’t be low forever, and an ARM will have your payments increase as rates do
- A fixed rate is easier to budget for and easier to understand
If you don’t plan on being in the house for a very long time, maybe an ARM makes sense. You can go with it and hope the interest rates don’t rise quickly, meaning you can enjoy those lower payments until you resell the house.
Do you have any other questions on fixed rate vs. adjustable rate mortgages? Give us a call at (949) 651-6300 and we’ll help any way we can.