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Fixed versus Adjustable Mortgage

Choosing the Right Mortgage Refinance Option

Mortgage loans offer two options: a FRM (fixed-rate mortgage) or an ARM (adjustable-rate mortgage). Fixed rate mortgages provide security and predictability. On the other hand, adjustable rate mortgages can offer the potential for savings, especially if interest rates go down. How do you decide which of these options is best for you? A coin toss may not be the way to take such an important decision. Read this article to dispel the uncertainty about ARMs and FRMs so you can take an informed decision and streamline your financial outlook.

Fixed rate mortgages vs. Adjustable rate loans

Fixed rate mortgages have the same fixed interest rate for the entire duration of the loan. Whether the interest rates go up or down, you don’t have to worry because your rate will remain the same throughout the tenure of your loan and you can plan your cash flows better.

On the other hand, adjustable rate mortgages are tied to a benchmark index. As the market rates fluctuate, the benchmark changes and if affects the rate you have to pay every month. There are many ways in which ARMs can vary, but the most important variables are:

The tenure of the initial rate

The frequency and range of adjustment of the interest rate

Predictability vs. savings

Adjustable rate mortgages often offer a low opening rate that can remain in place for three to seven years. On the other hand, fixed rates offer you the security of knowing that your monthly outflow will never change, whatever happens to the market interest rates. In order to decide which option works best for you, consider the following factors:

Your risk-taking appetite

Your planned duration for owning your home

Here’s how it works. If you are buying a home for the long haul, fixed rate may be better for you. For someone planning to sell their home in lets day five years, the adjustable rate option can offer a low opening rate and they can sell before the rate is revised. It is possible to calculate what your ARM and FRM refinance rates and payments will be by using an online calculator.

However, the factor that will ultimately outweigh any other considerations if your appetite for risk. Even if you are fairly certain that you intend to sell or refinance in a few years, there is a risk involved in the ARM option. You may prefer to pay a little more in the FRM option for the predictability, security and peace of mind it affords.

Bottom-line, you don’t need to flip a coin to decide which option suits you best! While FRM and ARM offer their own set of advantages, you probably know which is the clear winning option for you!

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