Find Your Match: Fixed- vs. Adjustable-Rate Mortgages (ARM)

When it comes to buying a home, one of the most critical decisions you’ll make is selecting the right mortgage. Like homes themselves, mortgages come in many sizes and types. Two of the most common options are fixed-rate and adjustable-rate mortgages (ARMs). Deciding which one is right for you depends on several factors, including your tolerance for risk, how long you plan to stay in your home, and current market conditions. 

What is a fixed-rate mortgage? 

A fixed-rate mortgage is a popular choice among homebuyers due to its predictability. As the name suggests, the interest rate on a fixed-rate mortgage remains the same throughout the loan term—whether it’s 15 or 30 years. This means your monthly mortgage payment, which includes principal and interest, remains consistent. 

Advantages of fixed-rate mortgages 

• Predictable payments. Since the interest rate doesn’t change, your mortgage payment stays the same for the life of the loan, making budgeting easier. 
• Stability in rising rate environments. If market interest rates increase, your fixed rate protects you from paying more. 

Disadvantages of fixed-rate mortgages 

• Higher initial rates. Fixed-rate mortgages often start with a higher interest rate compared to ARMs. 
• Missed opportunities if rates drop. If interest rates decrease, your rate remains unchanged unless you refinance.  

What is an adjustable-rate mortgage (ARM)? 

An adjustable-rate mortgage offers an initial fixed interest rate for a set period, such as 3, 5, 7, or 10 years, before adjusting annually. Once the fixed period ends, the interest rate fluctuates based on market conditions, which can cause your monthly payment to increase or decrease. 

Advantages of adjustable-rate mortgages 

• Lower initial rates. ARMs typically start with a lower fixed interest rate than fixed-rate mortgages, making them appealing for short-term homeowners or those planning to refinance. 
• Potential savings. In declining rate environments, your monthly payments may decrease after the fixed period. 

Disadvantages of adjustable-rate mortgages 

• Uncertainty. Payments can rise significantly if market rates increase after the initial fixed period. 
• Complex terms. Rate adjustments depend on specific caps and indexes, which can be confusing to navigate. 

Can you refinance a fixed-rate mortgage? 

Yes, you can refinance a fixed-rate mortgage. Refinancing allows homeowners to replace their current loan with a new one, ideally with a lower interest rate. While this can lead to significant savings, it’s essential to factor in closing costs and how long you plan to stay in your home to determine if refinancing is worth it. 

• Pssst! Want to see what General Electric Credit Union’s (GECU) current mortgage rates are? Check them out online! 

How do I calculate a mortgage payment? 

Understanding how to calculate your mortgage payment is crucial for budgeting. Your monthly payment consists of: 

• Principal: The amount borrowed to purchase the home. 
• Interest: The cost of borrowing, determined by your interest rate. 
• Taxes and Insurance: Property taxes and homeowners insurance, often included in escrow. 

Using an online mortgage calculator can simplify the process. Simply input your loan amount, interest rate, loan term, and other details to estimate your payment. 

How much mortgage payment can I afford? 

Determining affordability depends on your income, debt, and financial goals. A common guideline is the 28/36 rule, which suggests: 

Housing costs (including mortgage, taxes, and insurance) should not exceed 28% of your gross monthly income; and total debt payments should not exceed 36% of your gross income. Use a mortgage calculator to evaluate how different loan amounts, rates, and terms fit within your budget. 

Navigating the mortgage process can be complex, but you don’t have to do it alone. GECU offers resources like online mortgage calculators to help you estimate payments and determine affordability. For personalized guidance, schedule an appointment with a dedicated GECU team member. We’ll help you explore your options, from fixed-rate to adjustable-rate mortgages, and find the right fit for your financial goals.