Fixed Rate vs. ARM—The Benefits of a Fixed Rate Mortgage or an ARM 

What are the benefits of a fixed-rate mortgage? What are the benefits of an adjustable-rate mortgage? How do they compare? 

Both loan options have their advantages and drawbacks and will depend on your individual circumstances. But when considering your long-term investment goals, a fixed-rate mortgage is frequently the better choice. 

In this article, we’ll explain why choosing a fixed rate is often the smarter option, as well as how they work. When we’re done, you’ll be able to make an informed decision about which type of home loan best suits your needs. 

What is the difference between a fixed-rate mortgage and an adjustable-rate mortgage (ARM)?

When it comes to financing a new home for yourself, the two most common options for mortgages are fixed-rate and adjustable-rate mortgages.

A fixed-rate mortgage (FRM)

This mortgage has a set interest rate. It stays exactly the same for the entirety of the loan, making its inherent predictability and stability ideal for many homeowners. 

An adjustable-rate mortgage (ARM) 

On the other hand, the main feature of an ARM is an interest rate that can periodically fluctuate. This variability might cost you more or less depending on market conditions. 

While an ARM may have lower initial payments, it typically results in higher payments later once the introductory rate completes. 

Pros and cons of FRMs and ARMs 

If you’re looking for stability and predictability—an FRM is likely the better choice for you. 

Because your interest rate remains the same throughout the entire term—meaning your mortgage payments will remain steady and surprise increases in the future are not for you to worry about. 

However, one downside is that fixed-rate mortgages often have a slightly higher interest rate versus an ARM—at least at the beginning of the loan. You might end up paying more interest over time. 

The dangers of ARMs

Opting for an adjustable-rate mortgage may seem enticing at first, but there are several disadvantages to consider before committing. 

With a variable-rate mortgage, your lender might change your interest rate at any point in time. While it’s possible this can lead to lower interest rates, it may also result in much higher rates as interest continues to rise—you never know what your future assessments will be under a variable rate contract. 

Why a fixed-rate mortgage is better than an ARM

There are certain benefits of a fixed-rate mortgage that simply cannot be ignored. As we’ve shown, the predictability and stability of your monthly payments are a big advantage.

Locking in a set interest rate means your payments remain steady throughout the life of the loan—allowing for much higher confidence in your budgeting, knowing that your payment will never increase unexpectedly. 

How federal rates affect your mortgage 

While rates are higher at the moment, the historically low rates that we’ve seen since the early 2000s are arguably an anomaly. 

This graph from the Federal Reserve shows how the 30-year fixed rate national average has been unusually low in recent years compared to the historical average.

Current 30-year rates—hovering around 6.25% as of May 18, 2023—are significantly lower than the overall average since they were first recorded in the early 70s. 

There is also no consensus on what the rates might do for the future. 

Several economists forecast that rates will drop by the end of 2023 to the 5.4%-5.6% range, but there is no overarching agreement on this. 

There has been a long-standing agreement that the forecasting of interest rates is rife with uncertainty. So while the interest rates may be expected to drop somewhat by the end of next year, by no means is this guaranteed. 

Unforeseen economic factors could upend all forecasting models and see interest rates rise sharply or plummet. 

Are you willing to gamble?

While a fixed-rate mortgage has the possibility of costing more in interest payments in the long run, a variable or ARM mortgage holds the possibility of your rate skyrocketing. 

If your mortgage payments suddenly rise beyond what you can afford—you risk losing your house and all the equity you’ve paid into it up to that point. 

Is it possible to refinance a fixed-rate mortgage?

While it may seem counterintuitive to refinance a fixed-rate mortgage, there are still instances where this move might make sense.

One of the most common reasons you might refinance is to obtain a better interest rate if they should drop significantly, thereby lowering monthly mortgage payments. 

Another reason is to change your loan term—either shorten or extend it—which can also affect their monthly payments and overall loan costs. 

Additionally, some choose this option to take cash out of their home equity, which can be used to finance expenses like home repairs or college tuition.

However, it’s crucial to note that refinancing a fixed-rate mortgage may come with some costs, such as closing fees, penalties, and appraisal fees. 

Evaluating these potential expenses, along with the potential savings, will be fundamental in determining if refinancing is a good option.

Homefinity can help you make a home—and make it affordable

All in all, it’s clear that a fixed-rate mortgage is often the better option than an adjustable-rate mortgage. Fixed rates tend to provide greater security and lower interest payments over the length of a loan, plus more predictability when it comes to monthly breaks and budgeting. 

If you’re considering refinancing or applying for a home loan, getting in touch with an experienced mortgage specialist may be the best way to evaluate your options. 

Homefinity offers competitive rates with personalized service and advice from dedicated experts, making sure their clients always get the best deal.  

So don’t let the uncertainty of ARMs weigh you down; take charge and opt for FRM stability today. 

Get in touch with the mortgage experts at Homefinity today to explore your possibilities!

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