Choosing between a fixed rate mortgage and an adjustable rate mortgage (ARM) is one of the most important decisions you can make when choosing a home loan. Let's find out why.
ARMs typically start at a lower rate, but change over time. Those changes depend on the financial markets, meaning they can go up or down. These changes are then reflected in your monthly payment. For example, if your rate goes up, so will your payment. In some cases, ARMs are capped to limit your monthly payment from changing too much.
ARMs are typically shown as 5/1 or 7/1. The first number represents the length of the fixed interest-rate period, while the second number shows how often the rate will change after the initial period ends. For example, a 5/1 ARM is fixed for the first 5 years, then changes every following year.
Fixed rate mortgages are the most popular option for people who value stability, and who plan on staying in their home for a long time. It's important to note, however, that even though the interest rate is fixed, changes to your property taxes, homeowners insurance or mortgage insurance can still affect your monthly payments.
ARMs may work well for people who plan on paying off their mortgage quickly, or who know they'll be moving before the fixed period of their mortgage ends. Keep in mind that if you stay in your house longer than you expected, you may end up paying more in the long run.