Homebuyers often have to face the dilemma, whether to get a Fixed Rate Mortgage (FRM) or Adjustable Rate Mortgage (ARM). On one hand, are the cost savings offered by ARM; on the other, is the financial security assured by FRM.
As the name suggests, Fixed Rate mortgage is wherein the borrower is supposed to repay the loan amount at a fixed interest rate through the loan tenure. Resultantly, the monthly principal and interest payments remain constant in this type of mortgage.
In contrast, Adjustable Rate mortgage is wherein the interest rate changes through the tenure. Resultantly, the monthly principal and interest payments keep varying with time. The good thing is that most ARMs carry caps that limit the possible rise in the interest rate. So, the rate may rise up but it doesn’t get beyond that cap.
The rate varies according to the prime lending rate pre-set by the lender. More often than not, these calculations are complex and give shady mortgage lenders an opportunity to pull big profit margins by misinforming borrowers. Even the most discreet lot of borrowers may get confused over these calculations, let alone plain borrowers. So, you need to play it smart when it comes to choosing ARMs.
Early on during the loan tenure, the rate and payment on adjustable rate mortgage is low. The resultant low initial costs can, no doubt, be very inviting. In spite of all of that, there’s a degree of uncertainty involved in ARMs. So it doesn’t suit the financial tastes of reserved borrowers and low-risk investors.
Since FRMs need the borrower to pay a fixed monthly repayment amount, it becomes easier for him/her to budget accordingly. If you happen to be one of those who’s bent on financial planning, you should go for FRMs. For borrowers who are financially secure and expect an increase in income in the near future, should pick up adjustable rate mortgages over fixed rate mortgages. Fixed rate mortgages are also better for those borrowers who are planning to stay in one place for a long time.
If the market is constantly tumbling, it’s wise to prefer adjustable rate mortgage over fixed rate mortgage. When the rate falls, borrowers get to leverage it and translate into cost savings. But in a fixed rate mortgage, they end up resorting to refinancing and having to bear closing costs and fees. On the same note, if the market is in no mood to put brakes on the rising rate, it’s better to opt fixed rate mortgage. Fixed rate mortgages might end up being a bit costlier than adjustable rate mortgage but are less severely affected by inflation.
A lesser known fact about Adjustable Rate Mortgage is that it might affect your credit history negatively and put your creditworthiness at stake. You need not worry if you have a flying credit score. However, if you are struggling to earn a decent credit score, it’s better to go for Fixed Rate Mortgage.
To tie it all together, when choosing a mortgage, there are a number of factors to consider. Before making up your mind, get to know the pros and cons of both types of mortgages. Once you know the drill, choose a plan that best fits your financial needs.