Whether you are buying a new home or planning to refinance, you may be asking the question – ARM vs Fixed mortgage rate – which one is better? When you are trying to make a decision on whether to take an Adjustable Rate Mortgage or a Fixed, you should consider two factors:
- How long you plan to stay in the property?
- What is the difference in the interest rate between an ARM & a Fixed?
Let me elaborate this:
Rates on ARMs are usually lower than fixed rate loans. But the rates are fixed only for 5 or 7 years. So if you do plan to live in your house for more than that period, you may risk your mortgage adjusting into a very high rate prevalent at that time. However, if the current interest rate difference is substantial you may still want to take the risk.
This chart assumes a $400,000 loan, the fixed rate is 5.25%, while for a 5 year ARM the start rate is 4.5%. In 5 years you would have saved $10,920 in monthly payments on an ARM loan. Assume, the rate on the ARM adjusts to 6% after that and you pay the same rate for next 25 years. In that case, if you kept the loan for 30 years – on a Fixed rate, you would have saved $31,080 in mortgage payments.
As you can see in the example if you were to keep the house for 5 years it absolutely made sense to get an ARM. However if you kept the loan for 30 years the fixed rate option made more sense. So make sure you factor both aspects mentioned at the beginning of the post before deciding on what kind of loan program works better for you.
If you would like help on deciding which program is better suited for your situation contact me or fill out our rate quote form.
Download our FREE eBook
“How to Buy Your First Home in the Bay Area – A Step-by-step guide to the Home ownership” by entering your information in the form below.
Something I have noticed in all your blog posts and I thought I’d give you a compliment on is how solid your English and spelling are. Where did you learn to write so good? It seems like you have a certification in writing from a College.
My husband and i have been so more than happy when Chris could finish off his investigation through your ideas he had through your web page. It is now and again perplexing to simply happen to be giving away techniques that men and women could have been trying to sell. And now we acknowledge we’ve got you to thank for that. All of the explanations you made, the simple site menu, the relationships your site help create – it is everything astounding, and it’s really leading our son and us imagine that the theme is exciting, and that is rather vital. Many thanks for the whole thing!