Which is better -- a fixed-rate mortgage or an adjustable-rate mortgage? It's a common question among home buyers and refinancing households in Georgia.
The answer? It depends.
Fixed-rate mortgages give the certainty of a known, unchanging principal + interest payment for the life of the loan. This can help you with budget-setting and financial planning. Some homeowners say fixed-rate loans they offer "peace of mind".
Adjustable-rate mortgages do not.
After a pre-determined, introductory number of years, the initial interest rate on the note -- sometimes called a "teaser rate" -- moves up or down, depending on the existing market conditions. It then adjust again every 6 or 12 months thereafter until the loan is paid in full.
ARMs can adjust higher or lower so they are necessarily unpredictable long-term. However, if you can be comfortable with uncertainty like that, you're often rewarded with a very low initial interest rate -- much lower than a comparable fixed rate loan, anyway.
Freddie Mac's weekly mortgage survey highlights this point.
The interest rate gap between fixed-rate mortgages and adjustable-rate mortgages is growing. It peaked 2 weeks ago, but remains huge at 1.16 percentage points.
On a $200,000 home loan, this 1.16 FRM/ARM spread yields a monthly principal + interest payment difference of $136, or $8,160 over 5 years, the typical initial teaser rate period.
Savings like that can be compelling and may push you toward an adjustable rate loan.
You might also consider a 5-year ARM over a fixed-rate loan if any of these scenarios apply:
- You're buying a new home with the intent to sell it within 5 years
- You're currently financed with a 30-year fixed mortgage and have plans to sell the home within 5 years
- You're interested in low payments, and are comfortable with longer-term payment uncertainty
Before choosing ARM over fixed, though, make sure you speak with your loan officer about how adjustable rate mortgages work, and their near- and long-term risks. The payment savings may be tempting, but with an ARM, the payments are never permanent.