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Fixed vs. Adjustable-Rate Mortgage: What's the difference?


If you're planning to buy a home, one of the biggest decisions you'll face is choosing between a fixed-rate and an adjustable-rate mortgage (ARM). Both options have pros and cons, depending on your financial goals, risk tolerance, and how long you plan to stay in the home. Here’s a breakdown to help you decide which is right for you.

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage has an interest rate that stays the same throughout the entire loan term—typically 15, 20, or 30 years. This means your monthly principal and interest payments remain consistent over time.

Pros:

  • Predictable Payments: Great for budgeting and long-term planning.

  • Stable Interest Rate: Protected from market fluctuations.

  • Ideal for Long-Term Owners: Best if you plan to stay in your home for many years.

Cons:

  • Higher Initial Rate: Compared to ARMs, fixed rates may start higher.

  • Less Flexibility: Not ideal if you plan to move or refinance soon.

What Is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage typically starts with a lower interest rate for a set period (e.g., 5, 7, or 10 years), after which the rate adjusts annually based on market conditions.

Pros:

  • Lower Initial Rate: Helps save money early on.

  • Good for Short-Term Ownership: Ideal if you plan to sell or refinance before the adjustment period.

Cons:

  • Unpredictable Future Payments: Rates (and payments) can increase.

  • Potential for Payment Shock: Sudden hikes may strain your budget.

Which One Should You Choose?

  • Choose a Fixed-Rate Mortgage if you want stability and plan to stay in your home long-term.

  • Choose an ARM if you want to benefit from lower initial payments and expect to move or refinance within a few years.

Conclusion:
The right mortgage depends on your financial plans and how long you intend to keep the home. Fixed-rate loans offer peace of mind, while ARMs offer flexibility and potential short-term savings. Compare rates, calculate your budget, and speak with a mortgage advisor before making a final decision.

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