Fixed-rate vs adjustable-rate mortgage: How to decide which one you should get

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  • Two common types of mortgages are fixed-rate and adjustable-rate mortgages.
  • A fixed-rate mortgage locks in your interest rate for the entire life of your loan.
  • With an adjustable-rate mortgage, monthly payments may change throughout the life of the loan.
  • Click here to compare offers from refinance lenders »

If you’re planning on becoming a homeowner one day, you’ll likely take out a mortgage to finance your purchase.

A mortgage is a loan to buy a home, and the lender charges interest. You’ll pay back the lender in monthly installments for a set amount of time, likely between 15 and 30 years.

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To determine a) how much interest you’ll pay, and b) whether your rate will change later, you’ll choose between two types of mortgages: a fixed-rate mortgage or adjustable-rate mortgage.

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Fixed-rate mortgage vs. adjustable-rate mortgage: What’s the difference?

With a fixed-rate mortgage, your interest rate remains the same for the entire life of the loan. If you have a 30-year mortgage, you’ll pay the same rate today as you will 30 years from now.

With an adjustable-rate mortgage, commonly referred to as an ARM, rates and monthly payments remain the same for a set period of time, then change periodically. For example, a 7/1 ARM locks in your rate for the first seven years, then your rate will fluctuate once per year. Your rate will either increase or decrease depending on rate trends in the US.

How to choose between a fixed-rate and adjustable-rate mortgage

Should you get a fixed-rate mortgage?

Here are some pros of choosing a fixed rate:

  • Fixed rates are at historic lows. Both fixed and adjustable rates are relatively low right now. Low rates signify a struggling economy, so they’ve trended downward as the US has grappled with the coronavirus pandemic. But many lenders are offering even lower rates for fixed-rate mortgages than for ARMs.
  • If mortgage rates increase, you keep your lower rate. Because rates are at historic lows, chances are, your rate will increase later if you choose an ARM. Rates can’t stay this low forever. But with a fixed rate, you get to keep your super low rate for the entire life of your loan, even if US mortgage rates go up.
  • Predictable payments make it easier to budget. Granted, certain payments that are wrapped up in your mortgage could change over the years, such as private mortgage insurance or property taxes. But your interest rate will stay the same from year to year, which could make it easier for you to plan out your monthly expenses.

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Should you get an adjustable-rate mortgage?

For a long time, ARMs came with some major advantages. Lenders offered lower rates during the intro rate period than they did for fixed-rate terms, making them a great choice for people who only planned to stay in the home for a few years. You could also snag a lower rate if US rates decreased from one year to the next.

There aren’t as many benefits to choosing an ARM right now, though.

These days, lenders are charging higher rates on ARMs than on fixed-rate mortgages, even during the intro rate period. And because rates are so low these days, it’s unlikely your ARM rate will decrease in the future. If anything, it will probably increase.

Fixed-rate mortgages are the better deal right now. But if you’re considering an ARM, you should still ask your lender about what your individual rates would be if you chose a fixed-rate vs. adjustable-rate mortgage. Everyone’s situation is different, so it’s possible an ARM could still be a good fit for you.

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