Fixed vs. Adjustable Mortgages – Which one is best for you?

You’ve found the perfect house.  You’ve figured out exactly what you want to do with the kitchen, where the kids’ rooms are going to be and the placement of the living room furniture. But have you spent any time determining the best way to finance your new dream home? If you haven’t, you should.  No, it’s not nearly as fun as mentally redecorating, but it is far more important and will have a lasting effect on how much money you have to spend on any future renovation.

The choice most homebuyers have is between a fixed or an adjustable rate mortgage (generally known as an ARM).  The first, as the name implies is a mortgage with a fixed interest rate that remains constant throughout the repayment period of 15 or 30 years, the two most common terms.  With interest rates still near all-time lows, this remains a popular choice, especially for people who have a stable, predictable income source, know they want to stay in their new location indefinitely, and can safely assume they won’t need or want to move in the coming years.

For home shoppers who desire an even lower initial interest rate, who may want to relocate in a few years, or who can safely assume their income will be on the rise, an ARM offers certain advantages.  The initial interest rate on a 30-year ARM is usually lower than the rate you would be eligible for on a similar fixed mortgage, at least for the duration of the initial fixed term of  anywhere from 1 to 10 years.  Right now that difference on average, is about 0.6 percent lower, which can be a sizeable savings in your initial monthly payments.  After the introductory period, the interest rate will be adjusted, usually annually, to a new rate based on some fixed standard, which almost invariably mean a higher monthly expense.  A common standard used to set adjustable mortgages is the published rate for US Treasury Bills.  Your new rate, for example, would be 2% – 3% above that.  The amount that your interest can go up each year is usually limited by agreement to some small amount, often a cap of 2%, so you are protected against wild interest rate rises that you can’t afford.  There is also an agreed-upon ceiling on the total amount the interest rate can be raised over the entire life of the ARM, so you have a predictable range of interest rates you might have to pay.

The Fed may raise interest rates again in the coming months, so anyone in a committed relationship with their new home will probably opt for a fixed rate.  The more flexible can choose an ARM. If the Fed does raise rates it would mean their long-term payments could rise.

 

Jennifer Ives-Groebl

Vice President,
Senior Mortgage Lender

860.393.9145

NMLS ID# 532621

 

Author: Jennifer Ives-Groebl

Jennifer has been with Litchfield Bancorp since 1994 and was promoted to Assistant Vice President and Senior Mortgage Originator shortly after graduating the Connecticut School of Finance & Management in 1998. Stationed in both our Torrington and Litchfield locations, Jennifer is well known and respected in the local residential real estate community and recognized as a resource for some of the more difficult transactions. Jennifer resides in Torrington and is actively involved in the local community. She is a long time member of the Torrington/Winsted Rotary club and is currently serving as its Assistant Treasurer. Jennifer is involved with Litchfield County Board of Realtors and serves as chair of the Audit Committee and a member of the Public Relations Committee. She is also a member of the Fuessenich Park Partnership; and through Education Connection, has participated in the Mentoring Program.

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