Adjustable Rate Mortgage vs. Fixed Rate Mortgage

Deciphering the meaning and implications of complex real estate terms can be daunting, especially when you are a first-time home buyer. To help you make an informed decision about one of the biggest purchases in your life, let’s explore the differences between adjustable rate mortgages and fixed rate mortgages.

Adjustable Rate Mortgage (ARM) – The interest rate is tied to a financial index making the monthly mortgage payment go up or down over time. 

Fixed Rate Mortgage (FRM) – The interest rate will remain the same for the entire life of the mortgage.

Before making a move on which mortgage to pick, you should ask yourself a few questions: 

• How large of a mortgage payment can you afford today? 
• Could you still afford an ARM if interest rates rise? 
• How long do you intend to live on the property? 
• In what direction are interest rates heading, and do you anticipate that trend to continue? 
• What is the worst case scenario?

Based on your answers, you’ll get a better understanding of what is best for your financial situation. Some examples of good candidates for ARMs are:

• Short-Term Homeowner 
• The Bump-Up-in-Income Earner
• The Pay-It-Off Type of person 

Choosing the right mortgage will help you avoid a costly mistake. When looking between an adjustable rate mortgage and a fixed rate mortgage, make sure you do not just go with the lowest monthly payment. Look at the full spectrum of what you are buying. If you need to, find a different home with a lower price tag and save towards achieving your long-term real estate goals.

At Cedar Frame Real Estate, we have resources to help you find what is in your budget when buying a home or property. We hope that you now know the difference between adjustable rate mortgages vs. fixed rate mortgages. Check out our YouTube series, Mortgage 101, to learn more and use the mortgage calculator on our website to help you get started.