Adjustable v. Fixed.

When you are thinking about a mortgage one of the really big and important aspects to consider is whether you pick an Adjustable Rate or a Fixed Rate mortgage.

As of today (5/23/2018) the current Annual Percentage Rate for a conventional 30 year mortgage is 5.066%.  Be careful, these rates are constantly changing so you must check with your bank to see what’s going on.  Based on a $250,000 mortgage the monthly payment would be $1,352 each month with a total pay-back of $486,776 at the end of the 30 years.

As of today the current APR for a conventional 15 year mortgage is 4.704%.  Again, for the same $250,000 mortgage the monthly payment would be $1,914, or $562 more each month but the total pay-back at the end of 15 years will be $344,592 or $142,184 LESS than the 30 year mortgage.  YES, there are a lot of advantages to a 15 year mortgage, but only if you can afford the higher monthly payment. 

Then we come to Adjustable Rate Mortgages, ARM.  One more time, for the same $250,000 mortgage today’s ARM monthly payment would be $1,234 or $118 less than a 30 year mortgage.  Many people automatically dismiss ARM’s with the Fairytale idea that they are simply a Bad Thing.  ARM’s do have advantages and disadvantages:

  • ARM advantages:
    • Lower monthly payments
    • It make buying a new home easier
    • GREAT if you plan to move along within a short time
    • GREAT if your financial future includes a steep rise in income
    • ARM’s are great if you are going to sell within a seven-ish year time frame
  • ARM’s are not for every one
    • If you plan on living in the same house for a lengthy time of year, an ARM is not for you
    • Interest rates can climb rapidly
    • ARM’s are complicated and can easily be confusing, be careful!

Like everything, check carefully and it does pay to shop around.

What do you think of an ARM?

Share this post