Adjustable-Rate vs. Fixed-Rate Mortgage: How They Can Impact Your Finances

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There are all kinds of mortgages for all kinds of borrowers — FHA loans, VA loans, jumbo loans and the list goes on. No matter the mortgage program, the interest you pay will be structured in one of two ways. With fixed-rate mortgages, the rate remains the same throughout the entire life of the loan. Adjustable-rate mortgages (ARMs) are just the opposite. They fluctuate up and down over time with the going market rate.

See: How Interest Rates Affect Your Wallet and the Bigger Economic PictureFind Out: Live Richer Podcast: Jaspreet Singh Gives Tips For Beginners in Real Estate Investing

Fixed-Rate Mortgages Are Simple and Stable

There are a few reasons why most mortgages are financed through fixed-rate loans. The biggest draw of all is that they give the gift of predictable monthly housing costs, which takes so much of the pain out of long-term budgeting. Most people choose this kind of mortgage because it offers:

Make Your Money Work for You

But They Cost More and Let You Buy Less

If you want the simplicity, ease and predictability that fixed-rate loans provide, you’ll have to be willing to make some tradeoffs, including:

ARMs Are Cheaper — In the Beginning

Adjustable-rate mortgages aren’t as common as fixed-rate loans — and they’re certainly not for every borrower — but they do offer several advantages, including: 

Make Your Money Work for You

But They’re Complicated — and They Can Get Expensive Fast

The teaser rate is fleeting, and unlike set-and-forget fixed-rate loans, taking your eye off an ARM can lead to big financial trouble. 

Make Your Money Work for You

ARMs can be a double-edged sword. Their lower upfront rates allow borrowers to secure bigger loans. But if rates rise, borrowers can into trouble fast if the loan stretched their budgets in the first place. ARMs can make sense for borrowers who plan to be in homes only for a short while. If played right, you can save a lot of money with an ARM if you sell before the teaser rate expires — but that success depends on future market conditions. With a fixed-rate loan, you know what’s coming for decades down the line no matter what happens — but you’ll pay a little more for that peace of mind.

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