Nov 17 2023

Fixed vs. Adjustable-Rate? Let’s compare.


What’s the difference between a Fixed-Rate and an Adjustable-Rate Mortgage? Which should you choose?

As the market changes, so does demand for different loan products. Lately, you might have noticed that headlines about ARMs (Adjustable-Rate Mortgages) are everywhere. That’s because when mortgage rates increase, demand for ARMs increases too.

Currently, ARM activity continues to rise. The Adjustable-Rate Mortgage was first popularized in the 1980s, when mortgage rates were more than three times what they are today.

While an ARM isn’t the right choice for everyone, our present environment suggests that now is an ideal time to consult with a mortgage expert and consider all your options.

Fixed vs. Adjustable-Rate: What’s the smarter choice?

Here are some advantages of a Fixed-Rate Mortgage:

  • It has a set rate. As the name suggests, the interest rate you qualify for on a Fixed-Rate Loan will remain the same for the life of your mortgage.
  • It has a stable monthly payment. Expect your monthly principal and interest payment on your mortgage to stay the same, no matter what’s going on in the market. Note that variables like home insurance and property taxes can still cause your payment to fluctuate.
  • It’s user-friendly. A Fixed-Rate Mortgage is common, straightforward, and easy for most buyers to understand. (But remember, your Academy Loan Officer is here to discuss and explain both loan types.)
  • It offers protection if rates rise higher. This is why a Fixed-Rate Mortgage remains the most popular loan type—it provides long-term security.
  • It has the option to refinance if rates drop. If mortgage rates decrease in the future, as some predict they will, you can consider refinancing to lock in a lower rate.

Here are some disadvantages of a Fixed-Rate Mortgage:

  • You may pay more initial interest. A Fixed-Rate Loan could cost you more in the short-term, compared to the interest you may pay on the initial fixed period of an ARM.
  • Your monthly payment won’t decrease. The only way to lower a monthly payment on a Fixed-Rate Mortgage is to refinance when rates drop.

The main draw to a Fixed-Rate Mortgage is that it’s predictable. This type of mortgage is typically seen as a good choice if you’re planning to stay in your home for the long-term—longer than 10 years.

Can’t decide between a Fixed-Rate and an ARM?

Contact your local Academy Loan Officer for customized guidance.

Here are some advantages of an Adjustable-Rate Mortgage:

  • It has a variable rate that's usually lower for the first few years. Generally, an ARM starts at a lower rate for its initial term; for example, the first number in a 7/6 ARM reflects its initial fixed period (seven years), and the second is how often it resets after (every six months).
  • It typically starts with a lower monthly payment. A lower initial rate results in a lower monthly payment, saving you money on interest in this initial fixed period.
  • It may be easier to qualify for.  An ARM may provide you with more wiggle room when qualifying for a mortgage because of its possibility for a lower initial rate than a Fixed Mortgage.
  • It may increase your buying power. Qualifying at this possible lower rate might also give you a boost in buying power, enabling you to afford a home in a higher price range.
  • It has the option to refinance after the initial fixed period. Like a Fixed-Rate Loan, you can look into refinancing to a different loan type, term, or rate.

Here are some disadvantages of an Adjustable-Rate Mortgage:

  • You may see monthly payments change after the initial fixed-rate period. However, ARM rate caps do apply, limiting how much your interest rate could potentially rise (or fall).
  • You may find it harder to budget. With a 7/6 or 10/6 ARM, interest resets every six months after the initial fixed period, causing your payment to go up or down based on market rates.

ARMs can be attractive because payments typically start out cheaper before rising after a set, fixed period. ARMs are usually seen as a good choice if you’re planning to move or refinance before this fixed term ends.

Are you looking for a lower mortgage payment?

Academy’s Adjustable-Rate Mortgages offer several advantages for homebuyers, particularly those who don't plan to stay in a home for longer than 10 years or plan to refinance. If you’re interested in securing a lower initial interest rate and lower monthly mortgage payment: Contact your local Academy Loan Officer.

Please consult a trusted professional as personal circumstances may vary. No specific results are guaranteed. Not all applicants will qualify. MAC524-1486690.