Fixed vs. ARM? Which one is right for your client?

When the housing boom hit in the 2000s, many borrowers would often choose the ARM to qualify for a home that they may not have been able to purchase with a fixed-rate mortgage. This would allow them to have a lower interest rate initially and have the ability to pay down more principal before the loan is adjusted.

Today, fixed-rate mortgages (FRM) are at record lows and with the fluctuations in the housing market, the ARM has decreased in popularity. FRMs now account for 90% of purchase and refinance loans.

But just because something is more popular doesn’t necessarily make it better. For some, it’s a matter of preference based on their financial plans and goals. Others prefer the security of FRMs and knowing that no matter what, their rate will stay the same. But as property prices rise and getting qualified becomes more difficult, the ARM is steadily becoming more favorable.

Fixed-Rate Mortgages

Pros:

• Stability: No need to worry about interest rates changing and your payments increasing.
• Tax benefits: In the early years of FRMs, the payments are heavily weighted with interest and not principal which results in a higher interest tax deduction.
• Low rates: Currently, rates are near all-time lows.

Cons:

• More expensive: Monthly payments are typically higher leading to a large expense over the life of the loan.
• Harder to acquire: Since the interest rates are usually higher than the ARM, it is more difficult to qualify for the loan.
• Slower equity growth: Home equity usually takes longer to accrue vs. an ARM.

Adjustable-Rate Mortgages

Pros:

• Lower initial rate: The lower rate during the fixed period results in lower initial payments.
• Equity builds faster: You’ll be able to capitalize on growing home equity while interest rates are low.
• Flexibility: If you are likely to move again within the next few years, you could do so before interest rates adjust. You can also choose to refinance at any time if you qualify.
• More freedom: Homeowners will need money for other projects and expenses, and an ARM gives them the extra cash to do so.

Cons:

• Uncertainty: Interest rates can and will change.
• Possible higher payments: Borrowers may not be able to afford the higher monthly payments that will occur post-adjustment.
• More complex: ARMs can be difficult to budget, and they can add extra stress and worry for those with hectic lives or adjusting income. Should you choose to refinance, it could end up costing more than holding on to a fixed rate.

So which one is the right choice? It depends on your needs. Some will enjoy the protection and security of a fixed-rate mortgage, while others might favor the affordability and accessibility of the adjustable-rate mortgage. Borrowers must weigh their appetite for risk against their desire for security. They’ll also want to consider factors like future income changes and large budget items like potential new family members.

FSB Mortgage is a nationwide, bank-backed lender offering a broad range of loan products to retail customers. Get in touch today to learn about our flexible lending products, fast turn times, and exceptional customer support.