Choosing between an adjustable rate mortgage (ARM) and a fixed-rate mortgage is one of the most significant choices a prospective homeowner makes during the home buying process. The primary distinction between these two types of mortgages lies in the interest rate; unlike a fixed-rate mortgage, the ARM’s interest rate can fluctuate over time.
To determine which mortgage type suits you best, it’s important to ponder over the following questions:
What are the anticipated trends for future interest rates – an increase or decrease?
Typically, yet not always, the predicted trend depends on the current interest rates at the time of your home purchase. For instance, data from the Federal Reserve Bank of St. Louis shows that the average interest rate on a 30-year fixed-rate mortgage varied from 18.6% in 1981 to 3.3% in 2012. A fixed-rate loan would be beneficial if you anticipate that future rates will increase.
When do I plan on selling the property?
An ARM could be an appropriate choice for individuals planning to sell their homes before the expiration of the ARM’s initial low-interest rate.
Am I expecting a substantial increase in my income in the future?
If you have high confidence that your income will significantly increase by the time the ARM’s promotional rate ends, it might be advantageous to take the lower interest rate. This saving can either boost your financial reserves or enable you to afford a larger house than what a higher fixed-rate mortgage would allow.