When buying a home, there are numerous factors to consider. From selecting the ideal property to securing the right mortgage, thorough research is essential throughout your homebuying journey. With SW...
Fixed-Rate Vs. Adjustable-Rate Mortgages — Which is Right for Me?
When buying a home, there are numerous factors to consider. From selecting the ideal property to securing the right mortgage, thorough research is essential throughout your homebuying journey. With SWBC Mortgage by your side, you can navigate this complex process with confidence. Our team, backed by over 30 years of experience in the industry, is dedicated to guiding you every step of the way. Whether you need help understanding loan options or navigating the mortgage process, SWBC Mortgage is here to support you in making informed decisions and achieving your homeownership dreams.
In this blog, we will help you determine whether a fixed or adjustable-rate mortgage is right for you.
Fixed-Rate Mortgages
According to the Federal Housing Finance Agency, more than 96% of U.S. borrowers had a fixed-rate mortgage in 2024, and for good reason. A fixed-rate mortgage is defined by an interest rate that does not change over time. The interest rate you are offered when you secure your home loan is the rate that will remain until the loan has been paid off. Fixed-rate mortgages can be great for long-term loans and homebuyers searching for stability in their monthly payments.
The Pros of Fixed-Rate Mortgages
- Fixed-rate mortgages offer stability in one’s monthly payments, remaining the same over the life of your loan.
- When interest rates are high, you will be paying less since your rates will not adjust.
- If approved, there is the potential to refinance your loan when interest rates have dropped.
The Cons of Fixed-Rate Mortgages
- Unless you are able to refinance your loan, you will be stuck with higher payments if interest rates drop.
Adjustable-Rate Mortgages
An adjustable-rate mortgage (ARM) is defined by an interest rate that can change according to the current outlook of the market. This means that your interest rate possesses the possibility of dropping or rising.
Many adjustable-rate mortgages have a tendency to offer a lower initial interest rate than their fixed-rate counterparts. After the introductory period has ended, however, your rates are likely to go up and will continue to adjust periodically.
The interest rates for adjustable-rate mortgages are determined by a broader market of interest rates that is otherwise known as an index. When the index increases, your interest rates — and ultimately, monthly payments — will increase, as well.
On the other hand, when the index decreases, so too will your monthly payments. However, it is important to know your mortgage’s terms, because some adjustable-rate mortgage agreements will place a cap on how low one’s interest rate may decrease. On the plus side, though, they can also place a cap on how high your interest rates may increase.
An ARM can be a great option for short-term loans if you can afford potential increases in your payments and have wiggle room for unpredictability. When determining whether an ARM is right for you, consider these pros and cons:
The Pros
- During the initial period and when rates are low, you possess the potential to save a significant amount of money on your monthly payments.
- When payments are low, you can put more money toward paying off your principal balance.
- You don’t have to make a trip to the bank when interest rates drop in an attempt to refinance your loan — it will adjust for you.
The Cons
- When interest rates in your index are higher, your monthly payments will be, too.
- There is more unpredictability in your monthly payments and interest rates throughout the life of your loan.
- ARMs can be complex and difficult to understand.
3 Things to Consider When Making Your Choice
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When choosing between a fixed-rate and adjustable-rate mortgage, there are many things to consider about your own budget, needs, and goals. A few of these considerations include:
- How long do you plan to keep this home? If you plan to keep this property long-term, a fixed-rate mortgage will likely be the option that best suits your needs. However, if you do not intend to keep the loan for long, you may consider an adjustable-rate loan.
- What does your budget look like? If you can afford the potential for higher monthly payments, an adjustable-rate mortgage may still be on the table and could hold the potential for savings. However, if you need stability in your budget and want inflation protection, a fixed-rate mortgage is the way to go.
- What are your financial goals? Are you looking for consistent payments over the long term or hoping for lower payments now? Do you wish to take advantage of lower rates, even if it means there is a risk of paying higher ones?
Make the Home-Buying Process Smoother with SWBC’s Experienced Mortgage Team
Ultimately, one’s mortgage needs and goals will be personal and unique. Finding the right mortgage for your lifestyle and dreams can be easier if you receive guidance from a mortgage expert. SWBC’s loan officers are here to provide you with the perfect combination of guidance, expertise, and convenience to streamline the process of securing your home loan. Find a loan officer near you here!
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