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

In past years we’ve seen some great rivalries! Kentucky vs. Duke, Pepsi vs. Coca-Cola, Marvel vs. DC. And today fixed-rate mortgages vs. adjustable-rate mortgages.

Which one is better for your customers? The classic adjustable-rate mortgage (ARM) or the trendier fixed-rate mortgage (FRM)? Your borrowers will need the scoop on both in order to choose the best loan for them.

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 principle 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. Remember pet rocks? 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.

It’s more important than ever to give your borrower the pros and cons of both mortgage types to help them select the mortgage that best meets their financial goals.

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 principle which results in a higher interest tax deduction.
• Low rates: Currently, they are at an all-time low.

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: They’ll be able to capitalize on growing home equity while the interests rates are low.
• Flexibility: If the borrower is likely to move again within the next few years, they could do so before interest rates adjust. They can also choose to refinance at any time if they qualify.
• More freedom: Homeowners will need money for other projects and expenses, and an ARM gives them the extra cash to do so.
• If borrowers had taken out an ARM loan 20 years ago they would have paid record low rates for the last 20 years!

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 they 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 borrower. 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. Help them weigh their appetite for risk vs. their desire for security. They’ll also want to consider factors like future income changes and large budget items like potential new family members.

Contact an FSB Mortgage team member today and learn more about our competitive rates and various products that give your clients the resources and options to choose their best fit.

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.