Understanding Mortgage Types
When applying for a mortgage, you’ll choose between a fixed-rate mortgage or an adjustable-rate mortgage (ARM). Your decision impacts monthly payments, interest rates, and long-term costs.
What Is a Fixed-Rate Mortgage?
A fixed-rate mortgage has the same interest rate for the entire loan term. This means monthly payments remain stable, making it easier to budget.
- 📌 Common loan terms: 15, 20, or 30 years.
- 📌 Best for buyers who want stability and plan to stay long-term.
What Is an Adjustable-Rate Mortgage (ARM)?
An adjustable-rate mortgage (ARM) has an interest rate that changes over time. It starts with a low introductory rate, then adjusts based on market conditions.
- 📌 Common types: 5/1 ARM, 7/1 ARM, 10/1 ARM (fixed rate for 5, 7, or 10 years, then adjusts annually).
- 📌 Best for buyers who plan to sell or refinance before rates increase.
Fixed-Rate vs. ARM: Pros and Cons
| Loan Type | Pros | Cons |
|---|---|---|
| Fixed-Rate Mortgage | ✔ Predictable monthly payments ✔ No risk of rate increases ✔ Easier budgeting | ❌ Higher starting interest rate ❌ Less flexibility if rates drop |
| Adjustable-Rate Mortgage (ARM) | ✔ Lower initial interest rate ✔ Lower monthly payments at first ✔ Good for short-term homeownership | ❌ Rate increases over time ❌ Monthly payments may rise ❌ Harder to predict long-term costs |
Real-World Example: 30-Year Fixed vs. 5/1 ARM
Let’s compare a $300,000 loan under both mortgage types:
| Loan Type | Initial Rate | Monthly Payment | Rate After 5 Years |
|---|---|---|---|
| 30-Year Fixed | 6.5% | $1,896 | 6.5% (fixed) |
| 5/1 ARM | 5.0% | $1,610 | Adjusts based on market |
How to Decide: Fixed-Rate vs. ARM
Ask yourself these key questions:
- 📅 How long will I stay in the home? (Short-term buyers may benefit from an ARM.)
- 📈 Do I expect interest rates to rise? (Fixed rates protect against increases.)
- 💰 Can I afford rate adjustments? (ARMs may increase payments over time.)
“Fixed-rate mortgages offer stability, while ARMs provide short-term savings. Choose based on your financial goals.”
— Sarah Thompson, Mortgage Expert
Frequently Asked Questions
Which mortgage type is best for first-time homebuyers?
Fixed-rate mortgages are more predictable and safer for first-time buyers.
Can I refinance an ARM into a fixed-rate mortgage?
Yes! Many buyers start with an ARM and refinance before rates adjust.
How often do ARM rates change?
After the fixed period (e.g., 5 years on a 5/1 ARM), rates adjust annually.