Comparing Fixed-Rate and Adjustable-Rate Mortgages

Fixed-rate mortgages and adjustable-rate mortgages (ARMs) both have their pros and cons. This article compares the two mortgage types.

Fixed-Rate Mortgages
The main benefit of a fixed-rate mortgage is that your payment remains the same through the life of the loan. This predictability makes planning easier. They are also much simpler to understand.However, if want to take advantage of dropping interest rates, you would have to refinance, which requires additional paperwork and costs.Also, if mortgage interest rates are high, they can be an expensive option since there are no initial rate cuts.Finally, fixed-rate mortgages are pretty standard from lender to lender, which means there is little room for customization of your loan.

Adjustable-Rate Mortgages (ARMs)
ARMs can allow you to afford a bigger mortgage. If you know your income will be rising or know you will be selling the house in less than five years, ARMs may be a good option for you.Also, if rates begin to fall, you do not need to refinance in order to see your payments go down; they will automatically be recalculated at the new, lower rates.However, with an ARM, your payment and interest rate can go up significantly during the life of the loan, even with caps in place. The initial rates are usually lower than market rates, so when you receive your first adjustment, it can be quite a change, especially since the caps don't always apply to the first adjustment. For example, an annually adjusted ARM for $150,000 may start at 5.75%, but a 6% cap could allow it to go to 11.75% within four years. This would raise the payment from $875 to $1,514, an increase of $639.