Myths about adjustable-rate mortgagesby Tim Manni
Below is a post by Travis Pelto, first appearing on our partner site the Zing blog at Quicken Loans:
Coke vs. Pepsi, chocolate vs. vanilla, The Godfather vs. Goodfellas; life is full of polarizing choices like these. In the home loan world that debate seems to be between fixed and adjustable rate mortgages, but unlike the debates in soda, ice cream flavors or mafia movies, both sides are not equally represented. Adjustable rate mortgages seem to get a far worse reputation than their fixed-rate brothers, and it seems to come from a few misconceptions. Just like we discussed misconceptions on HARP here on the Zing blog, today let’s look at two big myths about adjustable rate mortgages.
Adjustable-rate mortgages are unstable
This misconception comes from titular nature of an adjustable rate mortgage, specifically the adjustable part. Explained simply, fixed-rate loans are meant for home buyers who plan on living in their home for a while (this is why 15- and 30-year are the most popular options for fixed-rate mortgages), and adjustable rate mortgages are meant for people looking to stay in their house for potentially less time (hence 5-, 7- and 10-year ARMs being popular). Fixed-rate loans tend to have higher monthly payments and rates that stay consistent, while ARMs have lower monthly payments and rates but the rates can adjust over time, potentially lower after a fixed period of time.
Now this is where people get turned off—the idea of their rate changing leaves uncertainty in the air. However, adjustable rate mortgages have interest rate caps that don’t let the rate change too rapidly in a given period. The cap can change given your mortgage agreement, but interest rate caps successfully prevent outrageous jumps in ARMs and give them stability.
Most people prefer 30-year fixed-rate loans
As said before, there are pros and cons to both of the loan types discussed here but fixed-rate loans have been the more “popular” choice for years now. Most countries only allow adjustable rate mortgages, so America is one of the few that gives homeowners the option. Despite what popular opinion may be ARMs can be advantageous to people for many reasons. If you know your salary will grow in the next few years, an ARM makes much more sense in terms of a shorter loan and adjustable rates. Also, if rates rise for fixed-rate loans, a longer term ARM could make more financial sense than a fixed rate.
Ultimately, loans can be as unique as the homeowner seeking it. So whether it’s fixed or adjustable, research the rate that’s right for you. Hopefully you can save yourself some money if an adjustable rate works for you, just make sure you don’t dismiss it as soon as you begin your home loan process.