Mortgage War: ARM vs. Fixed Rate Mortgage

After countless days of scouring for that perfect dream home, you now come face-to-face with a
dilemma: What Mortgage should you take? Buying a home is one of the major decisions you can
make in your life. It is both a rewarding and a stressful experience where a good research will help
you get the best deal that suits your finances. Choosing the right home at the right place can be
exhilarating. Now that you have made your choice, it is then time to visit your bank and have a
lender determine if you qualify for a mortgage.
Your current income, credit score, and credit history will determine the maximum amount of
mortgage that you can qualify for. After being qualified, you will then have a choice between an
ARM or an adjustable rate mortgage, and a fixed mortgage. There are things that you need to
know when it comes to an ARM vs Fixed Rate Mortgage, and it is important that you know the
advantages and disadvantages of both. Generally, mortgage refers to the interest rate, a constant
interest for fixed rate mortgage and a variable interest rate for an adjustable rate mortgage. Here
are the differences that you need to know:

Fixed Rate Mortgage

PROS:
1. Constant interest and payment rates, regardless of inflation rates.
2. It makes budgeting easier, where you can forecast your monthly and yearly expenses.
3. Simple to understand policies which work best with first-timers.
4. Ideal for homeowners who want to refinance their homes, without worrying on increases of
payment amounts in the future.
5. No room for uncertainties when it comes to interest rates.
CONS:
1. Falling rates that make the buyers suffer losses on the amount of their home investments.
2. A need to refinance to avoid foreclosures.
3. Since there is no break in rates, fixed rate mortgage can be too costly.
4. Maintaining a favorable interest rate can mean additional expenses and time spent on
tracking your tax forms and bank statements.
5. Cannot be customized for a borrower’s individual preference.
Adjustable Rate Mortgage
PROS:
1. Buyers have a lower payment compared to a fixed rate mortgage.
2. Buyers can take advantage of falling real estate rates, making them avoid refinancing their
loans.
3. Works great for those who can predict the rise and fall of interest rates in the future.
4. Because of the low payment terms, buyers can use more money for savings and other
important things.
5. Offers a cheaper alternative for those wishing to buy bigger homes, or for those who plan to
buy another home in the future.

CONS:
1. You can pay more than the usual cost of your home due to the unpredictable interest rates.
2. Complicated and confusing ARM contracts can make you sink into a pool of debt.
3. Due to the instability of economic conditions, your income may not be sufficient to pay
higher interest rates in the future.
4. You can risk penalty for non-payment due to future crisis like unemployment.
5. You can end up owing more money than what your home originally costs.
For you to be able to choose the perfect mortgage option that’s best for you, you need to do your
homework and see the best plan that fits into your lifestyle and budget. The last thing you want is
putting a noose around your neck while trying to pay for a mortgage you can barely afford. Always
read the fine print before closing that deal with your lender and know if you will be required to pay
other fees, like a real estate tax and a private mortgage insurance fee.

If you find certain features of both mortgage types appealing, you can always ask your lender for a
hybrid financing option. You can ask for a fixed interest rate for a certain period of time and get a
lower payment term that works well with your budget. Everyone always want to have that dream
home so avoid heavy risks that can lead to foreclosures. Always choose smart and get the best
out of your home’s mortgage.