Lenders create mortgages with two major types of interest rates: fixed and adjustable. As the name suggests, a fixed rate mortgage has an interest rate that does not change. The buyer locks it in at the beginning of the mortgage and pays that same interest rate for as long as he keeps the mortgage. In contrast, most adjustable rate mortgages are set up with a fixed rate for the first five years, plus the potential for an annual adjustment every year after that for the duration of the mortgage. This is often called a 5/1 ARM. Each type of mortgage has its advantages, but most buyers come out with a clear choice in favor of one type or the other. Fixed rate vs ARM, consumer’s guide:
Advantages of Fixed Rate Mortgages
Advantages of Adjustable Rate Mortgages
Making the Choice Between a Fixed Rate and ARM
Borrowers need to consider the broader market when evaluating which type of mortgage is better. For example, in April 2013, Bankrate.com reported an interest rate of 3.61% for the average 30-year fixed rate mortgage and a rate of 2.66% for the first five years of an ARM. Because the fixed rate of 3.61% is historically low, this is a superb rate to lock in for the next 30 years. On the other hand, the adjustable rate of 2.66% is almost definitely going to increase after the first five years. Because the ARM is likely to cost a lot more in the long run, most people buying in 2013 are opting for a fixed rate.