One of the biggest choices in a home loan is whether the interest rate stays the same or can change. Neither is better for everyone. It depends on your budget, your plans and how much uncertainty you are comfortable with.
Fixed-rate mortgages
With a fixed-rate loan, the interest rate and the principal-and-interest payment stay the same for the whole term, commonly 15 or 30 years.
- Predictable payments that are easy to budget
- Protection if market rates rise
- The starting rate is often higher than the starting rate on an adjustable loan
Adjustable-rate mortgages (ARMs)
An ARM starts with a fixed rate for an initial period, such as 5, 7 or 10 years. After that, the rate can change on a schedule, based on a market index plus a margin. ARMs have caps that limit how much the rate can move at each adjustment and over the life of the loan. Ask for these numbers before you decide.
- The starting rate may be lower than a comparable fixed rate
- Payments can rise after the initial period
- It can suit someone who expects to sell or refinance before the rate adjusts, but there is no guarantee that you will be able to
Questions to ask yourself
- How long do I expect to keep this loan?
- Could my budget handle a higher payment later?
- How comfortable am I with uncertainty?
- Could I refinance later, and what would it cost?
A simple way to think about it
If you value certainty, plan to stay a long time, or have a tight budget, a fixed rate is often the safer fit. If you expect to move or refinance within the initial fixed period and can absorb a higher payment, an ARM may be worth comparing. Remember that refinancing depends on your credit, your home value and market conditions at that time, so do not count on it.
Lenders must give you a Loan Estimate showing the rate type, the payment and how it can change. Read it closely and ask about anything unclear.
Every borrower is different. If you would like to talk through your own situation, the MonaLending team is happy to help.
