There are a few key differences between adjustable-rate mortgages and fixed-rate mortgages that are important to understand before choosing between the two.
The primary difference is how the interest factor of these mortgages work. Luckily, there are several online tools including calculators you can use to compare the two mortgage options to help you make a more informed decision.
Learn about what both a fixed-rate and adjustable-rate mortgage is, how they are different, and where you can find mortgage calculators to compare them in terms of your own situation.
What Is an Adjustable Rate Mortgage (ARM)?
An adjustable-rate mortgage (ARM) is a mortgage option in which the borrower's interest rate will vary throughout the life of the loan. This mortgage type has an initial interest rate that is fixed for a set period of time and then periodically adjusts every year or even on a monthly basis. How much the interest rate will change will depend on an index or benchmark in addition to a spread known as an ARM margin.
ARM mortgages are typically portrayed as two numbers. For example, a 3/30 ARM means that the interest will be a fixed rate for the first three years of the loan and then will vary for the remaining 30 years. A 5/2 ARM means that the interest rate is fixed for five years and will then reset every two years after that.
After the initial fixed-rate period, the interest rate on an ARM will either decrease or increased spending on an index plus a set margin. Most ARM mortgages will go by one of three indexes: the London Interbank Offered Rate (LIBOR), the 11th District cost of funds index, or the maturity yield on one-year Treasury bills.
An ARM mortgage is a good choice for homeowners who are financially prepared for interest rate fluctuations who those who want to pay off their loan in a set period of time.
What Is a Fixed-Rate Mortgage?
A fixed-rate mortgage is a loan in which the homeowners pay a fixed interest rate through the entire life of the loan. This type of loan is typically offered as an amortized loan but can also be given as a non-amortizing loan. Amortized fixed-rate mortgages are one of the most popular types of loans among homeowners.
It's important to note that there is some risk for homeowners who opt for a fixed-rate mortgage loan. This is due to the interest rate environment. When interest rates are higher, this can be beneficial for homeowners as it protects them against increasing interest rates. However, when rates are lower, homeowners could overpay on their mortgage interest rates. In this case, some homeowners may choose to refinance their loans to secure lower interest rates.
Fixed-rate mortgage loans are best for homeowners who want a reliable interest rate and monthly payment that does not change despite the unpredictable economy.
What Are the Differences Between ARM and Fixed Mortgages?
The most obvious difference between adjustable-rate mortgages and fixed-rate mortgages is the function of interest in the loan. With fixed-rate loans, you will pay the same interest rate throughout the entire loan term. On the other hand, an adjustable-rate mortgage will reset its loan terms at varying intervals throughout the life of the loan.
Additionally, most ARM loans start with a lower interest rate than fixed-rate loans. However, the ARM loan interest rate is subject to increase after the initial set period of time if interest rates rise. But, if interest rates stay low or fall, an ARM can potentially save homeowners money compared to fixed-rate mortgages.
ARM loans are often attractive to first-time homebuyers thanks to the lower interest rates. A lower interest rate can ultimately increase your buying power, giving you more freedom as to how you spend your money on a new home. ARMs are also great for people who tend to move around a lot or want to keep their options open.
ARM and Fixed-Rate Mortgage Calculators
There are several online tools available to help you decide which type of mortgage loan is best for you. ARM and fixed-rate mortgage calculators allow you to put in your unique loan information and provide you with a realistic estimate of what you can expect to may with each type of mortgage.
This adjustable rate mortgage calculator helps you determine what your payments may be with an ARM. To use this calculator, simply input your anticipated mortgage amount, the mortgage term, and the initial interest rate your payments will be based on. You can also select whether the amortization is annually or monthly for a more accurate estimate.
Additionally, you can use this ARM and interest-only ARM vs. fixed-rate mortgage calculator to compare the payments between a fixed-rate mortgage and the two different types of ARM loans. This calculator shows what your anticipated monthly payments will be for all three loans so you can clearly see which option would be best for you given your circumstances and needs.
In addition to these two calculators, you can find several more calculators on our financial tools webpage. Other calculators to consider using include our Blended Rate Mortgage Calculator, Interest Only ARM Calculator, Mortgage Loan Calculator, and Mortgage Payoff Calculator.
Final Thoughts on ARM and Fixed-Rate Mortgage Loans
When choosing which type of mortgage loan is the best option for you, it's important to consider several factors.
These factors include:
- your long-term goals.
- how long you plan to live in the house you are buying.
- your expected income as the years progress.
- how quickly you want to pay off your loan.
Using the calculators on our website and working with experienced mortgage professionals can ensure you make the best choice for you.
Please contact us if you have any questions or would like more information on our mortgage calculators and resources.