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Purchasing a home typically requires getting a mortgage, but knowing which type to choose may seem confusing to some borrowers. The two main choices, a fixed-rate mortgage or adjustable rate mortgage (ARM), each have distinct advantages that can serve a homeowner’s interests well. Learning the differences between the two and choosing the right loan for your personal circumstances could save you thousands of dollars over the course of your mortgage.
While there are many differences when looking at fixed-rate mortgages versus ARMs, there are also some similarities. For example, fixed-rate loans and ARMs typically share the same term length options, which is how long the borrower has to repay their loan. Receiving either loan type is also dependent on your credit score.
A number ranging from 300 to 850 is your credit score, which is used to determine how reliable you are to pay back the money you borrow. The higher your score, the more likely you are to get a loan with favorable borrowing terms.
Fixed-rate mortgages are loans homebuyers get from a credit union, bank or mortgage company. Versus ARMs, fixed-rate mortgages are straightforward with monthly principal and interest payments that never change. A lot of homebuyers choose fixed-rate mortgages regardless of their timeline for buying a larger home, relocating or even downsizing.
A drawback of fixed-rate mortgages is they tend to come with a higher interest rate than ARMs because lenders have to predict interest changes over a significant amount of time. Another concern in choosing a fixed-rate mortgage versus an ARM is when interest rates are high it can be harder to qualify for a loan because payments become less affordable. But despite their higher interest rate, fixed-rate mortgages are often picked by homebuyers because the predictable monthly payment helps them budget and plan accordingly.
Adjustable rate mortgages come with a low introductory interest rate which can adjust regularly — sometimes increasing and sometimes decreasing — after a predetermined time period. Based on terms set by the lender, there is a cap set indicating how much a borrower’s interest rate can be raised or lowered over each rate adjustment period.
The main appeal in choosing adjustable rate mortgages is their introductory interest rate is usually lower than a fixed-rate mortgage. These types of mortgages are popular among homebuyers who either do not plan to stay in their house for more than three to seven years, or they hope to refinance and receive better mortgage terms in the future. Another popular aspect of getting an ARM versus a fixed-rate mortgage is the extra budget flexibility borrowers get, which can enable them to pay down principal faster than they could with a fixed-rate mortgage.
Everyone’s financial situation is different, so it’s important to look ahead and try to anticipate your needs so that you pick the right mortgage for you. If you still aren’t sure which option is best, here are some further considerations:
It comes down to personal preference, but adjustable rate mortgages are popular for a variety of reasons. In addition to them being suitable for homebuyers who intend to stay in their house for a shorter period of time, or if they plan to refinance, ARMs are often picked by individuals who are close to retirement or when interest rates are high.
Fixed-rate mortgages are not necessarily better than ARMs, but they are more common. This is because many people like knowing their interest rate will never change. It allows for easy planning and gives peace of mind, as homebuyers know that regardless of what happens with interest rates and market conditions, their interest rate will not be impacted.
Whether you’re interested in getting a fixed-rate or adjustable rate mortgage, Digital Federal Credit Union has great home mortgage options available. A not-for-profit credit union with more than a million members scattered throughout the United States, DCU has better rates and lower fees than banks because we serve our members, not a group of stockholders.
Please note that membership is required to accept a DCU Mortgage Loan. Visit our membership eligibility page for more information.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.