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Fixed-rate mortgages are safer than adjustable rate mortgages

There are numerous loan factors to consider when getting a mortgage.

Depending on your financial risk tolerance, the size of your budget, and your housing needs, you can choose between fixed-rate mortgages (FRM) and adjustable-rate mortgages (ARM). Most people opt for a fixed-rate mortgage.

Fixed-Rate Mortgages

What exactly is a fixed-rate mortgage? Home loans with a fixed rate are known as fixed-rate mortgages. With these types of loans, the interest rate remains constant during the loan term.

In other words, the regular principal and interest payments remain unchanged, while the mortgage payments may fluctuate as the homeowners' insurance or property taxes vary over time.

A fixed-rate mortgage is the most appreciated type of financing since it provides budget certainty and consistency.

However, it normally has a higher starting interest rate compared to an ARM, thereby limiting the size of houses you can afford.

The most popular issued fixed-rate mortgage is the 30-year term mortgage.

For a 30-year $300,000 fixed loan with a 3 percent interest rate, monthly payments will be around $1,265, excluding insurance and taxes.

Advantages Of Fixed-Rate Mortgages

  • Principal payments and interest rates stay the same.

  • Budgeting is easier when there is stability. Since the housing payments remain the same, homeowners can manage their money more confidently.

  • It's straightforward to understand, making it good for first-time buyers instead of trying to comprehend what a 5/1 ARM with a 2/2/5 cap means.

Disadvantages Of Fixed-Rate Mortgages

  • Fixed-rate mortgage borrowers who wish to take advantage of falling interest rates must refinance and pay new borrowing costs and fees.

  • A higher rate loan without refinancing when rates drop could cost you more in interest in the long run.

  • The terms are almost identical from one lender to another, with little possibility for customization.

How Does a Fixed Rate Mortgage Differ from An Adjustable-Rate Mortgage?

While an FRM retains the same interest rate throughout the life of the loan, the interest rate on an Adjustable-rate Mortgage varies periodically.

Consequently, monthly payments fluctuate throughout the loan's term. When you obtain an ARM, you're advised that the interest rate may change over time.

The bank gets to decide depending on the current mortgage market, aka the "index rate." The index that the lender will use will be specified in the ARM documents.

It could be an Interbank Offered Rate (ibor), the Prime Interest Rate of the United States Federal Reserve, or something else. When the market index rises, so do your interest rates.

ARM has the advantage of lower initial costs, allowing you to make an offer on an expensive home.

It is also beneficial if you plan to keep the house for only a few years, when the interest rates are still low, and move before the rates are adjusted. It can help you save and invest quite a lot.

That said, getting an adjustable-rate mortgage is betting on the market, which is never in your control at all.

It is impossible to predict the amount you will be required to pay each month and the eventual cost of your home. And here's why FRMs are better at the moment.

Why are Fixed-Rate Mortgages safer than Adjustable-Rate Mortgages?

Interest rates are low right now. Since the beginning of the pandemic, the interest rates on various kinds of mortgages have been historically low.

They hit an all-time low in January, and despite the expectations that they would rise as the economy starts to reopen, they haven't shot up to the levels they were before the Virus hit.

For now, if you are looking to refinance or buy, you can get this low-interest rate locked in and enjoy it throughout the life of your loan.

A fixed-rate mortgage allows you to have a greater degree of control over your money and shifts the risk of fluctuating interest rates back to the lender.

After all, they're the ones that get the profits, so it only makes sense that they shoulder the risk.

ARMs are only appealing because of the lower initial cost.

While this may save you a few dollars initially, the lender will eventually evaluate your loan and increase the rates on you, leading to higher eventual costs.


Adjustable-rate mortgages are only beneficial if you plan on keeping the house for a few years and move on before the rates rise.

Otherwise, the lender will adjust the rate on you, increasing the costs of your loan. Also, ARMs are often quite complex.

Lenders have a lot more leeway when calculating margins, adjustment indexes, caps, and many other terms, which leads to a lot of confusion, and you may end up tied to a loan with unfamiliar terms.

That's why most people prefer fixed-rate mortgages. With an FRM, once you lock in an interest rate, your interest and principal expenses remain constant throughout the duration of the loan.

The advantage is you get the stability and predictability needed to make long-term plans and also save money when interest rates rise.

With over 50 years of mortgage industry experience, we are here to help you achieve the American dream of owning a home. We strive to provide the best education before, during, and after you buy a home. Our advice is based on experience with Phil Ganz and Team closing over One billion dollars and helping countless families.

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