It is very easy to get confused when presented with different loan options. To make this process as simple as possible, we give you insight into the difference between fixed-rate and adjustable-rate mortgages (ARM) and their benefits, so that you can choose what suits you best.
- What is the basic difference between a fixed-rate and an adjustable-rate mortgage?
- One of the most popular loan types for buying a property is an adjustable-rate mortgage loan. With this type of loan, the interest rate remains the same for a certain period (usually two, three or seven years depending on your lender), then adjusts annually. This means that the rate can rise and fall according to the market situation.
Relatively low initial rates, compared with fixed-rate mortgages, is one of the unique, and most favored features. Although rates can take sharp turns up and down, there is a cap on how much the rate may rise up to. This option provides the most flexibility if you plan to refinance soon or expect a healthy income growth. In addition, if rate interests go down, you are likely to benefit from this . The drawback involved is that it is hard to understand for first-time borrowers or with limited knowledge on loan options. Furthermore, if interest rates rise, you have the challenge of paying higher monthly installments on your property.
With a fixed-rate mortgage, the interest is set when you sign for the loan and will not change at any time in the future, which is the clear distinction between fixed-rate mortgages and ARMs.
Q: Is a fixed-rate mortgage a safer option?
- This option will suit you best if you:
- – Do not want to be in the midst of uncertainty over how much the interest rate may rise or fall during the loan period.
- – Want to pay a fixed amount, so that it is easier to maintain a budget according to your income.
The main disadvantage here is the inability to benefit from falling interest rates. If this happens, you would have to consider refinancing your loan plan. This can be both costly and tiresome. Although fixed-rate mortgage can be expensive for many borrowers, they are easy to understand and are thus often a safer option.