Fixed-Rate vs. Adjustable-Rate

What is an ARM, and does it matter?

When it is time to get a mortgage, it’s important to compare your options. There are two different types of mortgages, a fixed-rate mortgage and an adjustable-rate mortgage (ARM). A fixed-rate mortgage has the same interest rate for the loan’s entire life (or term). This means your monthly payments (principal and interest) won’t change. An ARM has a rate that is set for a certain number of years at the beginning of your loan, and then the rate will adjust based on the market. This means that your monthly payments will regularly adjust after the initial fixed-rate period. They may increase, but they also may decrease. It all depends on the market at the time your mortgage is scheduled to adjust.

So, which is better – a fixed or adjustable-rate mortgage?

There are benefits to both fixed-rate mortgages and adjustable-rate mortgages. So, it’s wise to look at both types of mortgages, weigh the pros and cons, and then make an informed decision. (Our experienced, local mortgage bankers can also help you look at your options.)

Benefits of a fixed-rate mortgage

The primary benefit of a fixed-rate mortgage is that the interest rate never changes throughout the life of the loan. Because the monthly payments are predictable, it is easy to calculate a long-term budget. Many buyers prefer the fixed-rate mortgage because there is no risk of interest rate increases for the entire loan period. This provides stability and peace of mind.

Another benefit of a fixed-rate mortgage is that if you can make extra payments toward principal at any point during the loan, there is usually no penalty for paying off the loan early.

BankSouth Mortgage allows you to customize and choose your term based on what makes sense for you. Usually, there are lower interest rates on shorter terms. Compare various fixed-rate loan terms with our loan comparison calculator on BankSouthMortgage.com, using the calculator in our ReadyLoan app, or having one of our local mortgage bankers help you.

A fixed-rate mortgage may be a good fit for you if you’re on a tight monthly budget or fixed income where slight rate increases may cause financial stress or hardship. It is also a great option in a low-interest rate market where you can lock in on a low rate.

Benefits of an adjustable-rate mortgage

There are many benefits of an ARM. The initial interest rate of an ARM is generally lower than a fixed-rate loan. A lower interest rate means less monthly expense. These savings may allow you to use that money elsewhere and ease the financial stress each month.

There are many different term choices with an adjustable-rate mortgage, such as 7/6 and 10/6. The first number is the number of years of the initial fixed rate. The second number is the frequency the rate adjusts (every six (6) months), after the initial fixed period.

Some buyers are nervous about the adjustable rate for fear they will not be able to afford the monthly payments if the interest rates increase significantly. While your monthly payment may increase or decrease, it’s important to understand that ARM loans have rate caps. The rate caps limit the amount your interest rate can change at each rate adjustment period and over the length of the loan.

A significant benefit for many buyers is that it may be easier to qualify for an adjustable-rate mortgage than a fixed-rate mortgage. And you may get approved for a higher loan amount with an ARM loan. This is because a large part of determining your loan qualification is evaluating your debt-to-income (DTI) ratio. This compares your monthly household income with how much you spend each month. With an adjustable-rate mortgage, your interest rate is lower; therefore, your monthly payments are lower, resulting in a lower initial debt-to-income ratio, which is often taken into account. To find out if you qualify for a loan and what loan amount you can afford, apply now online or through our ReadyLoan app.

An adjustable-rate mortgage may be a good fit for you if you plan to stay in your home for a shorter time. This may be due to a life change such as empty-nesters or a retiree planning to downsize, military station changes, a temporary job assignment, or purchasing a starter home. An ARM loan could be a great option, whatever your reason for relocation. It is also a great option in a high-interest rate market because you will lock in on a little lower interest rate at first, and then, after the initial lock period, as the market rates decrease, so will your interest rate.

How do you know which is right for you?

In addition to comparing the benefits of each type of loan, you will want to consider your income and monthly budget, life stage, plans for the future, current rates, and the economy. Every person has unique circumstances and financial goals.

Ready to get started? You can apply online or through our ReadyLoan app if you are ready to start.

Want help deciding on the best loan option for you? We’re here to help! Connect with a local mortgage banker.