Choosing The Right Mortgage Type: Fixed Rate or Adjustable Rate

Should I Choose a Fixed Rate Or Adjustable Rate?

There are a few questions you should ask yourself when deciding on the type of rate structure that is best for your mortgage/home loan. How long do you plan on living in the home? According to the National Association of Realtors, the average person lives in their home for about 13 years.

Which Scenario Sounds Like Yours?

If you intend on having a short homeownership duration, an Adjustable Rate Mortgage (also known as ARM) may be more beneficial because you can take advantage of the lower interest rate that the ARMs have during the fixed period. 

If you're more like the average homeowner and you're in it for the long haul, a fixed rate is likely to make more sense.

Do you want predictability in your monthly payment?

If so, a fixed rate mortgage will have the same monthly obligation for the life of your loan. An ARM, on the other hand, will have temporarily predictability, but after the fixed period, you'll experience fluctuations in your payment due to interest rate changes.

If your monthly mortgage payment were to increase, would you be able to afford it? How much frustration and hardship would that bring? The other side of the coin, however, presents the potential for the ARM to cause a reduction in your monthly payment. How much joy and freedom would that bring?

At the end of the day, it come down to risk tolerance. Those choosing and ARM should be prepared and capable of paying much more than what they would be paying during their fixed period were the rates to climb. Those choosing a fixed mortgage must be willing to lose out on potential savings were the rates to drop. Those are the risk you'd have to be comfortable with. Where do you see the market going? Do you think the interest rates will rise or lower in the future?

Be Mindful of the Timing

Timing has a lot to do with where the interest rates are headed.

As we all know, the market is cyclical. So what comes up must come down and vice versa. If rates have been low for a significant period of time, it would be wise to assume rates are bound to climb.

When we are in a period of low interest rates, a fixed rate mortgage would allow you to capitalize and lock in rates while low. An ARM wouldn't necessarily make sense during this time, but were we in a period of high interest rates, it might be prudent and more sensible to consider an ARM as you prepare for the fall of interest rates.