That’s a very good question and one you might have heard more than once. The question of an ARM vs. a Fixed Rate Mortgage is age-old and one the very first questions your loan officer might ask. You can do your own research about which is better but the answer might very well be neither. Or both. Or maybe just one of them. Confusing? It shouldn’t be but there are times when the answer is pretty much automatic while at other times it takes a bit more thought. Let’s explore the questions you should ask and answer to help guide you the rest of the way.
A fixed rate loan is pretty basic. The interest rate you choose when you lock in your loan is the rate is the same rate throughout the life of the loan. A fixed rate never changes. It’s fixed. An ARM, or an adjustable rate mortgage, can adjust over the life of the loan but only under the provisions set forth in your note.
An ARM has an index on which the rate is based plus a margin that is added to it. A common index today would be a 1-Year Treasury or a 1-Year Constant Maturity Treasury, or CMT. A margin might be 2.00 or 2.25. If the 1-Year CMT is 1.00 and the margin is 2.25, the new rate on which your payment is based is then 3.25% and will remain so until the next adjustment one year from now.
Most ARMs today come in the form of a hybrid mortgage where the interest rate is fixed for an initial period of time, say three or five years after which it turns into a rate that can adjust annually. So which is better? More specifically, what is better for your situation?
If you plan on keeping a mortgage for an extended period of time then a fixed rate might be the better choice due to the stability of the rate. ARMs and hybrids will have a lower start rate compared to a fixed. That means if you’re going to keep a mortgage for a relatively short period of time say only three, five or seven years, then an ARM or a hybrid is probably your better bet.
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