-When it comes to financing a home purchase, one crucial decision borrowers may need to make is choosing between a fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM). These two options have distinct features that can greatly impact a homeowner’s financial situation. Marc Coons, the Paso Robles home loan professional, explains the differences and highlights the benefits of each so you can make an informed decision.
A fixed-rate mortgage offers stability and predictability for homeowners. With an FRM, the interest rate remains constant throughout the life of the loan. This means that your monthly mortgage payments will remain unchanged over the loan term, regardless of fluctuations in the broader interest rate market. Here are some key benefits of FRMs:
- Predictable budgeting: The most significant advantage of an FRM is the ability to plan and budget with confidence. Knowing that your mortgage payment will remain the same allows you to establish a stable financial plan and allocate funds to other expenses accordingly.
- Protection from interest rate increases: In a rising interest rate environment, a fixed-rate mortgage shields you from higher payments. You won’t have to worry about your mortgage becoming unaffordable if rates soar, providing peace of mind and financial security.
- Long-term stability: FRMs are ideal for homeowners who plan to stay in their homes for an extended period. Locking in a fixed rate allows you to enjoy stability over the entire loan term, regardless of market conditions.
Unlike FRMs, adjustable-rate mortgages have interest rates that fluctuate based on predetermined factors. Typically, ARMs have a fixed rate for an initial period (e.g., 5, 7, or 10 years) before transitioning into an adjustable rate. Let’s explore the benefits of ARMs:
- Lower initial rates: ARMs often offer lower interest rates compared to FRMs during the initial fixed-rate period. This can result in lower monthly payments, enabling homeowners to allocate their funds towards other investments or goals.
- Flexibility and short-term 0wnership: If you anticipate a short-term stay in your property, an ARM may be an attractive option. The lower initial rate allows you to take advantage of the benefits while you are still within the fixed-rate period, potentially saving money during that time.
- Potential for rate decreases: ARMs provide the opportunity to benefit from falling interest rates. If market rates decrease, the interest rate on your ARM will adjust accordingly, resulting in lower mortgage payments and potential long-term savings.
Choosing the right option
Depending on the insight of a professional who specializes in home loans, such as Paso Robles’ Marc Coons, can help when choosing between an FRM and an ARM. In the end, the decision depends on your individual circumstances and financial goals. Consider the following factors:
- Risk tolerance: If you prefer stability and predictability, an FRM is likely the better choice. However, if you are comfortable with some level of risk and believe that interest rates will remain stable or decrease, an ARM could be suitable.
- Future plans: Evaluate your long-term plans for homeownership. If you envision staying in your home for many years, an FRM can provide peace of mind. Conversely, if you anticipate selling the property before the adjustable period begins, an ARM might be more advantageous.
- Financial flexibility: Assess your financial situation and determine how much you can afford to pay each month. An ARM may be more suitable if you need lower initial payments to accommodate other expenses or investments.
Deciding between an FRM and an ARM should align with your financial goals, risk tolerance, and homeownership plans.
The first step
Before worrying too much about whether an FRM or an ARM is the best choice, work with Marc Coons to help get the best loan possible. Marc has been helping people get home loans in Paso Robles and the Central Coast since 2004. Marc and his team, backed by Certainty Home Lending and with access to many lenders, can help smooth the way from applying for a loan to moving into the new home.
Buying a home, especially for the first time, can be nerve-wracking. Marc and his team can help with:
- Assessing your financial situation.
- Pre-qualifying for a loan.
- Presenting your application to several lenders for the best terms.
- Communicating and troubleshooting with potential lenders, and keeping you in the loop.
Home loan services include:
- Mortgage loans and financing
- Conventional, Jumbo, FHA, USDA, VA and 203(k)
- Construction loans
- Home purchase or refinancing
- Equity loans and HELOC (lines of credit)