No one can argue that Adjustable-rate (ARM) mortgage loans have saved borrowers money in recent years. But the savings are likely to decrease as rates continue to edge upward. Fixed-rate loans are usually the winners in rising-rate situations-the kind that many economists predict we'll soon face. We'll explore the benefits of both as we perform an ARM vs. Fixed Rate comparison. Fixed-Rate LoansWith fixed-rate loans, the principal and interest payment is identical for the life of the loan. The most popular terms are 15 and 30 years, but there are also 10, 20 and 40 year options. Fixed-rate loans are a good choice if interest rates are low or are expected to rise. You know your interest rate will never change, and if it goes down you can always refinance. They're also a wise choice for those on fixed budgets-if you don't expect your income to rise, you know exactly how much to budget for. Adjustable-Rate (ARM) Mortgage Loans
ARM mortgage loans have interest rates and monthly payments that fluctuate with the economy. There are caps (typically 2% a year) and a specified lifetime maximum to limit the total rate increase, so you'll know what your maximum payment amount will be. ARM mortgage loans are available with adjustment periods of six months, one year, three years or five years. There are also hybrid ARM mortgage loans that offer a longer initial fixed period and then begin adjusting every year after that. For example, a 5/1 ARM has a predetermined interest rate for the first five years and then adjusts yearly. Let's Perform a Loan Comparison
ARM mortgage loans can come with initial interest rates one to two points lower than fixed-rate loans, which lower your monthly payment when you first move into a home. ARMs are also good for home buyers who plan to be in their homes for a short time, due to the advantage of a lower initial rate and the opportunity to move before any significant rate increases. For buyers who are stretching their budgets to get into a more expensive home, the lower rate of ARM mortgage loans may make it easier to qualify for a larger loan. There are risks involved with ARMs, however, and home buyers should make sure they can afford the highest payments. Mortgage rates can vary from one lender to the next, so don't forget to make a loan comparison. No one is able to predict what will happen in the next seven years or the years after that. If you're willing to roll the dice on an adjustable, go ahead -- as long as you've done the math and are prepared to accept the payments if rates climb.
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