Choosing the right mortgage is one of the most important financial decisions you’ll make as a homebuyer. With several loan products available, it’s crucial to understand the two most common types: fixed-rate mortgages and adjustable-rate mortgages (ARMs). Each has unique features, advantages, and drawbacks depending on your financial goals and how long you plan to stay in the home.
Below, we’ll break down the key differences to help you decide which loan type fits your needs.
Fixed-Rate Mortgages
A fixed-rate mortgage maintains the same interest rate for the entire duration of the loan, which is typically 15, 20, or 30 years. This consistency provides stability in your monthly principal and interest payments, making it easier to plan your long-term budget.
Advantages of Fixed-Rate Mortgages:
Predictable monthly payments over the life of the loan
Easier to budget and plan financially
Protection from rising interest rates
Ideal for long-term homeowners
Disadvantages of Fixed-Rate Mortgages:
Initial interest rates are usually higher than those of adjustable-rate loans
Less flexibility if you plan to move or refinance within a few years
If you intend to stay in your home for a long time and want the certainty of steady payments, a fixed-rate mortgage may be the best fit.
Adjustable-Rate Mortgages (ARMs)
An adjustable-rate mortgage typically starts with a lower introductory interest rate than a fixed-rate mortgage. After an initial fixed period—often 5, 7, or 10 years—the interest rate can adjust annually based on market conditions.
Advantages of ARMs:
Lower starting interest rates can lead to initial savings
Good option if you plan to sell or refinance before the adjustable period begins
Can be beneficial in declining interest rate environments
Disadvantages of ARMs:
Payments can increase significantly after the initial fixed period
Less predictable budgeting over time
Potential risk if interest rates rise or if you remain in the home long-term
ARMs can be a smart choice for buyers who don’t plan to live in the home for more than a few years or expect their income to increase in the future.
What Should You Consider?
How long do you plan to stay in the home?
If this is your forever home, the stability of a fixed-rate loan may be worth the higher initial interest. If you anticipate moving within five to seven years, an ARM could save you money during that time.
How comfortable are you with risk?
A fixed-rate mortgage offers peace of mind with consistent payments. An ARM carries more uncertainty, but the lower initial rate may be attractive if you’re comfortable managing potential increases.
What are current interest rates?
When rates are historically low, locking in a fixed rate is often a smart long-term move. When rates are higher, you might find an ARM more appealing to reduce initial costs while waiting for potential rate drops.
What’s your financial situation?
If your income is steady and you want predictability, a fixed-rate loan provides that. If your income is likely to grow, or you want to prioritize lower early payments, an ARM may align better with your strategy.
Final Thoughts
There’s no one-size-fits-all solution when it comes to choosing a mortgage. The right loan depends on your financial situation, homeownership goals, and comfort with potential changes in your payments.
Taking time to explore both fixed-rate and adjustable-rate options ensures you make an informed decision that aligns with your lifestyle and long-term plans.
If you’re not sure where to start, our team at First Capitol Real Estate is here to help. We work closely with trusted lending professionals who can walk you through your options and help you choose the mortgage that’s right for you.
Reach out today to start your journey toward smart, confident homeownership.
