Which is the better option for you: fixed rate or adjustable?

The low initial cost of adjustable-rate mortgages, or ARMs, can be very tempting to home buyers, yet they carry a degree of uncertainty. Fixed-rate mortgages offer rate and payment security, but they can be more expensive, especially if you are not planning to stay in your home for a long period of time. So when it comes to Fixed Rate or Adjustable, here are some pros and cons:

Adjustable Rate Mortgages (ARMs)

Advantages

• Feature lower rates and payments early on in the loan term. Because lenders can use the lower payment when qualifying borrowers, people can buy larger homes than they otherwise could buy.
• Allow borrowers to take advantage of falling rates without refinancing. Instead of having to pay a whole new set of closing costs and fees, ARM borrowers just sit back and watch the rates — and their monthly payments — fall.
• Offer a cheap way for borrowers who don’t plan on living in one place for very long to buy a house.

Disadvantages

• Rates and payments can rise significantly over the life of the loan.
• Long-term budgeting becomes difficult once an adjustable loan moves into the adjustable phase.
• ARMs are difficult to understand. Lenders have much more flexibility when determining margins, caps, adjustment indexes and other things, so unsophisticated borrowers can easily get confused or trapped by shady mortgage companies.

Fixed Rate Mortgages

Advantages

• Rates and payments remain constant. There won’t be any surprises even if inflation increases and interest rates rise.
• Stability makes budgeting easier. People can manage their money with more certainty because their housing outlays don’t change.
• Simple to understand, so they’re good for first-time buyers.

Disadvantages

• To take advantage of falling rates, fixed-rate mortgage holders have to refinance. That means a few thousand dollars in closing costs, another trip to the title company’s office and several hours spent digging up tax forms, bank statements, etc.
• Can be too expensive for some borrowers, especially in high-rate environments, because there is no early-on payment and rate break.