Fixed Rate vs. Adjustable Rate Mortgage: Which is best?

When searching for a home loan, there are many factors to take into account. One of those decisions is whether to go with a fixed rate mortgage or adjustable rate mortgage (ARM). These refer to the interest rates on the loan you take out.

Fixed Rate Mortgage

A fixed rate mortgage has an interest rate that remains the same for the term of the loan - whether that is 15, 20, or 30 years. A fixed rate mortgage is a good option when interest rates are low, and it protects the borrower from sudden increases in monthly mortgage payments. In order to get a lower rate with a fixed rate mortgage, the borrower has to refinance, which includes new documentation and closing costs.

Adjustable Rate Mortgage

An ARM has interest rates that can change month-to-month or year-to-year. Adjustable rate mortgages start with a fixed term of a low interest rate (lower than fixed rate mortgages), which can be extremely enticing to homebuyers. The length of the this fixed term varies from lender to lender. From there, the rates go up and down with the market, and if they increase significantly, it means the borrower will be spending much more on monthly payments. An ARM may be a good option if you plan on moving in a few years.

Questions to consider when choosing fixed or adjustable rates:

• How long do you plan on living in the new home?
• Can you afford a significant increase in monthly mortgage payments?
• How often does the ARM adjust its rates?
• Is there a cap on how high the adjustable rate can go?
• What direction are interest rates heading?

New England Home Mortgage will help you go through the options and scenarios for both fixed rate and adjustable rate mortgages to be sure you are getting the best rate for your unique situation.