Happy times! Your search is over, you found a home. Whether it’s your first home or your dream home, what should be an exciting experience can also leave you with a lot of questions about mortgages between now and closing.
Jovia guides members like you, from all across Long Island, through the mortgage process every day. With our support, you’ll be able to navigate fixed rate vs. adjustable rate mortgages and determine which type of mortgage is the best fit for you. In this article you’ll learn about the different types of mortgages and the key factors to consider before locking in.
What is a Fixed Rate Mortgage?
A fixed rate mortgage has the same interest rate and monthly payment until the loan is paid in full. Common durations for fixed rate mortgages are 15 and 30 years. The benefit of a fixed rate is that you’re protected from rising interest rates and your monthly payment is set for the long term. Your monthly payment will be determined by the market rate at the time you secure your home loan. Since market rates fluctuate from day to day, depending on the rate on the exact day you secure your loan, your monthly payment will be slightly higher or lower. With a fixed rate mortgage, you pay more interest and less principal initially, but you’re given a longer duration to pay off the loan. A fixed rate is a great option for keeping monthly payments consistent until the loan is paid off.
How does an Adjustable Rate Mortgage (ARM) work?
An adjustable rate mortgage has a fixed interest rate for a set amount of time (usually 7 or 10 years), and a variable rate for the remainder of the loan. After the initial fixed period, the interest rate will adjust to a new variable rate annually based on current market interest rates for the life of the loan. With ARMs, you have less time paying at the initial rate before it resets higher or lower. During this period, your interest rate and monthly payment is initially lower than a fixed rate mortgage because you’re paying more principal and less interest. An ARM is a great option for keeping monthly payments smaller in the early stage of the loan.
For an easy way to understand the terms, just look at the name of the loan. For example, a 7/1 ARM, or adjustable rate mortgage, means that the interest rate is fixed for the first 7 years and then adjusts every year, or annually, thereafter. A 10/1 ARM is fixed for the ten years and adjusts annually for the remainder of the loan.
ARM vs Fixed Rate Mortgage: What's right for me?
Is an ARM the right option?
Are you a homebuyer that wants flexibility? Thinking about relocating closer to family or for a new job opportunity down the road? Do your goals include upsizing or downsizing in a few years? Maybe you even plan on paying off the loan in a short amount of time. If so, an ARM with lower interest rates initially, can provide more buying power than a fixed rate mortgage in the short term while getting you closer to your long-term goals.
If goals change, as they often do, you’ll want to ensure your income can support the monthly payments after the initial rate adjusts. When the rate adjusts, the new rate may be higher or lower than your previous rate so, your monthly payments will adjust higher or lower depending on the rate at the time it resets. Many ARMs come with rate caps that limit how high the rate can be adjusted.
If you plan on staying in your home long term or haven’t paid off the loan when the rate adjusts, you can refinance your ARM to a fixed mortgage when rates are at their lowest.
Is a fixed mortgage the right option?
Perhaps you’re established in your career? Do you have a growing family? Is this your dream home in the perfect location? If this sounds like you, even with higher monthly payments a fixed mortgage could provide the benefits you need over an adjustable-rate option. Knowing your monthly payments are the same for the duration of the loan can bring peace of mind and help you keep long term goals on track. If rates decrease during the life of the loan you can refinance to a lower interest rate. When interest rates are low, a long-term fixed mortgage is ideal to protect you from interest rate fluctuations.
ARM vs Fixed Rate Mortgage: Let's compare the numbers
|Fixed Rate |
|Fixed Rate |
|Adjustable Rate |
|Adjustable Rate |
|Median Long Island|
|20% Down Payment||$98,000||$98,000||$98,000||$98,000|
|*Monthly payment shown is principal and interest only.|
Knowing the numbers is great, but the most important factor when making a decision during the mortgage process is evaluating your options based on the factors that are important to your personal lifestyle. The decision to move forward with either a fixed rate or adjustable rate mortgage is about determining your individual goals, finances, and how much you can comfortably afford to spend on your mortgage.
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Mortgage Loan Originators at Jovia Financial and their unique identifier numbers (NMLS ID#) can be found here.
Chart above is provided to help you estimate your mortgage needs. Results shown are estimates only. All loan types, rates, and terms are based on an applicant's credit history and are subject to change without notice. Not all applicants may be approved.
NMLS ID#: 543667