Adjustable-Rate Mortgages vs. Fixed-Rate Mortgages: What’s the Difference and Why ARMs Can Benefit You! 

Purchasing a home is one of the biggest financial decisions you’ll make in your life. When you’re ready to take that leap, one of the most important choices you’ll face is the type of mortgage you should choose. Adjustable-rate mortgages (ARM mortgage) and fixed-rate mortgages are two of the most common options available. But how do they differ, and why might you consider a Carolina Home Mortgage ARM over a fixed-rate mortgage? Let’s break it down. 

What is a Fixed-Rate Mortgage? 

A fixed-rate mortgage is exactly what it expresses – your interest rate stays the same for the entire term of the loan. This implies that your monthly payments will never change, providing stability and predictability. Whether you have a 15-year or 30-year fixed mortgage, the interest rate you lock in today will stay the same for the whole life of the loan. 

A fixed-rate mortgage often feels like the safe choice. You know exactly how much you’ll need to pay each month, which helps with budgeting. This stability can be comforting, especially if you plan to stay in your home long-term.

 

What is an Adjustable-Rate Mortgage (ARM)? 

This is known as an adjustable-rate mortgage (ARM mortgage), which will have a floating rate of interest. The initial rate of an ARM is usually quite low compared to a fixed-rate mortgage, but after an introductory period – typically 3, 5, 7, or 10 years – it will reset periodically according to market conditions. 

These adjustments are indexed to a particular index, such as LIBOR (London Interbank Offered Rate) or the U.S. Treasury rate, which may rise, or fall based on economic conditions. Your payments may increase or decrease over the life of the loan. 

 

How Does an ARM Work? 

With Carolina Home Mortgage ARM, your interest rate is usually lower in the early years of the loan. For instance, you may start with a three-year ARM, where your rate is fixed for the first three years. After that, your rate will adjust, usually once a year, according to the market rate. 

The main advantage of an ARM mortgage is that your monthly payment may be lower than that of a fixed-rate mortgage, especially in the early years. But keep in mind that the rate can go up, so there is more uncertainty. Your payments could increase significantly after the adjustment period. 

 

Why Choose an ARM Over a Fixed-Rate Mortgage? 

Low Initial Payments: The interest offered for an ARM is typically much lower compared to other kinds of mortgages. This means if you plan on selling or refinancing before the rate adjusts, the low initial payments will not be a burden since the rates are sure to increase in the future. 

Savings: Provided that interest rates remain constant or fall during the introductory period, you can save money over the life of the loan. In fact, some borrowers refinance before their rate changes, which means they will enjoy a lower rate for the rest of their mortgage. 

For a Short Stay Homeowner- An ARM Mortgage will be right for you in case you plan to stay within the home less than the time it takes the loan to finish. For example, if you have plans of leaving the home within five years or less, you can make good use of the lower introductory rates without facing the rising rates. 

Greater Flexibility: Although a fixed-rate mortgage provides predictability, an ARM offers greater flexibility. You can benefit from lower rates if market conditions are favorable. 

 

The Risks of an ARM Mortgage 

While there are benefits, there are also risks being aware of. As mentioned, the interest rate on an ARM mortgage adjusts after a set period, and if interest rates rise, your payments can increase. This can catch some homeowners off guard, especially if they’re not prepared for higher payments. 

It’s important to understand the terms of the mortgage fully. Many ARMs have caps on how much the interest rate can increase at each adjustment period, as well as a lifetime cap on how high the rate can go. These protections can help limit your exposure to sharp rate increases, but it’s still essential to budget for the possibility of higher payments. 

 

Fixed-Rate vs. ARM: What’s Best for You? 

The choice between a fixed-rate and an ARM depends on your financial goals, how long you’re going to live in the house, and your comfort with potential rate changes. 

Fixed-Rate Mortgage: If stability, predictability, and planning to live in a home for the long haul are of paramount importance to you, a fixed-rate mortgage would be a better option. In that case, you would pay exactly the same amount each month and wouldn’t have to be concerned about what happens in the market. 

ARM Mortgage: If you can tolerate the variable interest rate mortgage and intend to sell or refinance within a few years, an ARM could be perfect. You would likely save more money, at least in the initial years of the loan, by taking the lower interest rate offered in the ARM. 

 

Getting Together 

It all depends on your situation when choosing between a fixed-rate mortgage and an ARM mortgage. If you want predictability and are staying long-term, a fixed-rate mortgage might be the way to go. But if you’re looking for lower initial payments and flexibility – and don’t mind the risk of future rate changes – Carolina Home Mortgage ARM mortgage could benefit you. 

Remember, the right choice is made when you understand your financial situation, goals, and risk tolerance. With the right information, you can make the mortgage decision that works best for you and your family. Whether you go with a fixed-rate mortgage or an ARM, ensure you understand how the terms work and how they fit into your long-term financial plan.