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Fixed-rate mortgages vs. adjustable-rate mortgages

When buying a home, one of the first decisions you have to make is the type of mortgage you want. How can you decide which is right for you? Don't worry, "mortgage" doesn't have to be a scary word. In this article, we’re demystifying the two most common types of mortgages: fixed-rate mortgage and adjustable-rate mortgage (ARM). Discover what these terms mean, the benefits of each, and which is right for you and your budget.

What is a fixed-rate mortgage?

You may have heard of a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage. With these loans, the borrower's interest rate is determined at the beginning of the loan term and won't change during the lifetime of the loan. So if your principal mortgage amount is $250,000 and the interest rate is 5%, the interest rate will stay at this rate as you pay off the loan. 

Although your rate is locked in for the term of your mortgage, rates on the open market will fluctuate up and down. If a lower rate becomes available, this is an ideal time to refinance your fixed-rate mortgage.

What is an adjustable-rate mortgage?

By comparison, an adjustable-rate mortgage (ARM) has a varying interest rate. At the beginning of your mortgage, the interest rate will stay the same for 5 to 7 years, depending on the terms of your loan. After this initial period ends, the interest rate will be adjusted on an annual basis. At Vibrant Credit Union, there's a limit on on how much your rate can increase each year—no more than 2 percent—as well as a 6 percent cap on rate increases over the loan's entire lifetime.

Which mortgage type is right for you?

Now that you understand the differences between each mortgage type, here are some of the benefits each offers.

 

Fixed-rate mortgage benefits

Adjustable-rate mortgage benefits

Interest rate stays the same throughout the lifetime of the loan  

Locks in a lower interest rate than a fixed-rate mortgage offers for the first 5–7 years  

If you get your loan when interest rates are low, you can keep that low rate for the lifetime of the loan, even if rates rise later 

If interest rates have decreased since you got your loan, you can potentially get a lower interest rate when the loan resets 

Easier to budget for monthly mortgage payments because they'll stay the same (though your property tax and homeowners insurance premiums can still go up)  

Mortgage payments will be cheaper for the first 5–7 years than they would be with a fixed-rate loan

If the interest rates go up, your mortgage will not be affected

You may be able to spend more on a home because your monthly payments will be lower than they would with a fixed-rate loan 

Perfect for buying forever homes because of predictable monthly payments

A good choice for starter homes or if you expect to move within a few years

 

Apply for a mortgage loan with Vibrant

Buying a home can be a stressful process. Applying for a mortgage doesn’t have to be. Vibrant Credit Union prides itself on its superior customer service and ability to match its members with the ideal mortgage. Contact us to discuss mortgage options with a knowledgeable banker.