May 31 2022

Fixed vs. Adjustable-Rate Mortgages

Learn more about the differences between a Fixed-Rate and an Adjustable-Rate Mortgage (ARM).

As the market changes, so does demand for different loan products. Right now, you might be noticing that headlines about ARMs (Adjustable-Rate Mortgages) are everywhere. That’s because when mortgage rates increase, as they have been, demand for ARMs also rises.

Recently, demand for ARMs reached a 14-year high. Like our current levels of inflation, this renewed interest in ARMs is also a throwback to the eighties. ARMs were first popularized in the 1980s, when mortgage interest rates were more than three times what they are today.

While an ARM isn’t the right choice for everyone, our rising-rate environment suggests that now is an ideal time to consult with a mortgage expert and consider one. Keep reading to find out why.

Fixed-Rate vs. ARM: What’s the smarter choice in 2022?

Here are some of the advantages of a Fixed-Rate Mortgage:

  • It has a set rate. As the name suggests, the interest rate you qualify for on a Fixed-Rate Loan will remain the same for the life of your mortgage.
  • It has a stable monthly payment. Expect your monthly principal and interest payment on your mortgage to stay the same, no matter what’s going on in the market. Note that variables like homeowner’s insurance and property taxes can still cause your payment to fluctuate.
  • It’s user-friendly. A Fixed-Rate Mortgage is common, straightforward, and easy for most homebuyers to understand. (But remember, our Loan Officers are here to explain both loan types and discuss your options.)
  • It offers protection if rates rise higher. This is why a Fixed-Rate Mortgage remains the most popular loan type—it provides long-term security.
  • It has the option to refinance if rates drop. If rates bottom out again, as they did during the pandemic, you can consider refinancing to lock in a lower rate.

Here are some disadvantages of a Fixed-Rate Mortgage:

  • You may pay more initial interest. A Fixed-Rate Loan could cost you more in the short-term, when compared to the interest you may pay on the initial fixed period of an ARM.
  • Your monthly payment won’t decrease. The only way to lower a monthly payment on a Fixed-Rate Mortgage is to refinance when rates drop.

The main draw to a Fixed-Rate Mortgage is that it’s predictable. This type of mortgage is typically seen as a good choice if you’re planning to stay in your home for the long-term—longer than 10 years.

Here are some of the advantages of an ARM:

  • It has a variable rate that's usually lower for the first few years. Generally, an ARM starts at a lower rate for its initial term; for example, the first number in a 7/6 ARM reflects its initial fixed period (seven years), and the second is how often it resets after (every six months).
  • It typically starts with a lower monthly payment. A lower initial rate results in a lower monthly payment, saving you money on interest in this initial fixed period.
  • It may be easier to qualify for. An ARM may provide you with more wiggle room when qualifying for a mortgage because of its lower payment requirement.
  • It may increase your buying power. Qualifying at this lower payment amount might also give you a boost in buying power, enabling you to afford a home in a higher price range.
  • It has the option to refinance after the initial fixed period. Like a Fixed-Rate Loan, you can look into refinancing to a different loan type, term, or rate once an ARM’s fixed period ends.

Academy Mortgage offers new 7/6 and 10/6 ARMs that have an initial fixed-rate period of seven or 10 years, after which the rate may adjust down or up every six months, according to market conditions.

Interested? Contact us for details.

Here are some disadvantages of an ARM:

  • You may see monthly payments change after the initial fixed-rate period. ARM rate caps do apply, limiting how much your interest rate could potentially rise (or fall).
  • You may find it harder to budget. With a 7/6 or 10/6 ARM, interest resets every six months after the initial fixed period, causing your payment to go up or down based on market rates.

Remember, as mortgage rates rise, demand for ARMs also rises. This is because ARM payments typically start out cheaper, before increasing after a set period of time. (Our new ARMs have an initial fixed period ranging from seven to 10 years.) ARMs are usually seen as a good choice if you’re planning to move or refinance; many homeowners opt to refinance before the seven to 10-year reset period anyway.

Are you looking for a lower mortgage payment?

Academy Mortgage's Adjustable-Rate Mortgages (ARMs) offer several advantages for today’s homebuyers. But these benefits can depend on your specific circumstances. If you’re hoping to buffer rising rates and secure a lower monthly payment: Contact a local mortgage expert to learn more about ARMs and get invaluable guidance.

This blog is intended for educational purposes only. Please consult a trusted professional as personal circumstances may vary. MAC523-1481343.