Fixed vs. ARM Loans

by Jane L.Feb. 27, 20173
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Fixed vs. ARM Mortgage Loans: Finding Your Fit

A mortgage is perhaps one of the most stressful steps of home ownership. Finding the house is a fairly straightforward process: You know what you want, you work with a realtor, and within a few days or weeks, you have located the perfect home. Next step, the mortgage. Finding a mortgage to fit your financial situation can be a time-consuming process, and this is where the water begins to get muddy.

When faced with different mortgages from different lenders, or different requirements for different mortgage types, you can easily feel overwhelmed and unprepared. However, choosing the best mortgage does not need to be such a stressful event. In this article, a comparison of Fixed Mortgage loans and Adjustable Rate Mortgage (ARM) loans will give you a better understanding of their differences and their benefits in meeting your individual needs.

Fixed Mortgage Loans

Fixed mortgages are simply what the title would imply: The rate and term are fixed for a defined period. Most lenders offer fixed rate mortgages in 5, 10, 15, 20 and 30-year terms, and as a general rule, the shorter the fixed term, the lower the interest rate. Fixed mortgages are offered as both conventional and FHA loans, and each program requires the borrower to meet certain qualifications. The most notable difference between the two programs focuses on the required down payment. Conventional loans typically require a 20% down payment, and FHA seeks only 3-5%.

Many traditional homeowners have opted for the fixed rate mortgage simply because of the stability offered. Since your monthly payment will not fluctuate over the life of the loan, you typically have an easier time with budgeting and planning.

Adjustable Rate Mortgage (ARM) Loans

Adjustable rate mortgages, or ARMs, offer greater flexibility and a lower interest with the initial monthly payment. Typically, an ARM will offer a fixed rate for the first few years and then adjust on a yearly basis every year thereafter. The initial appeal of the ARM has the potential to quickly fade over a few short years if the Federal Reserve significantly increases interest rates. In reverse, should interest rates drop, the monthly payment could see a significant drop as well. ARMs are best suited to homeowners with flexibility in their budget, especially when considering the possibility of a fluctuating monthly payment.

Finding Your Fit

Now, what does this truly mean for you, the mortgagee? How do you determine which time frame fits your individual needs, or which type of loan will work with your individual income and budgeting?

The process is not as complicated as it might seem.

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