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Fixed Rate vs Adjustable Rate Mortgages

Hand holding a drawing of house.

How to Save Money on Your Next Home Loan

There are a lot of home loan options out there. The two most common are the Fixed-Rate Mortgage and the Adjustable Rate Mortgage (ARM). Knowing the differences between the two could help you save thousands of dollars. Here’s what you need to know about each of these loan options and how to decide which one is right for you.

Ask Yourself Two Questions

First, determine how long you expect to live in the house you’re planning to buy. Will you move in less than 10 years? Do you plan to stay 15 years or more? That number is a big factor in which mortgage type you choose. The second question to consider is how comfortable are you with the possibility of fluctuating monthly payments?

Now, let’s use your answers as we look at each of the loan types.

The Fixed-Rate Mortgage  

A fixed-rate mortgage comes standard with long-term stability. From the first payment to the last, the amount you pay every month will not change much. Taxes and insurance premiums can adjust the payment slightly, but not a noticeable amount. If you like security and having control over financial aspects of your life, then a fixed-rate mortgage could be for you. Rivermark offers 10, 15, 20, and 30 year fixed rate loans.

But there is still the issue of how long you plan to live in the house. With a fixed-rate mortgage, if you don’t plan on staying at least 10 years, it might make more sense to finance the home with an ARM.

The Adjustable Rate Mortgage (ARM)

An ARM is ideal if you plan to sell your home in less than 10 years, because the interest rate on an ARM can often be lower than rates for fixed-rate mortgages. This lower rate means your monthly payments will be lower, which can help you afford more home. Or you can put those monthly savings into an account and use the funds for the down payment on your next home.  

Rivermark tip: If you need to use an ARM to make your monthly payments fit within your budget, you may be putting yourself at risk. An ARM should be used for homeowners who will either sell within a set number of years or who fully understand how an ARM works.

While the rate on an ARM is adjustable, it is locked during the first few years of the loan, depending on the ARM you choose. You have the option of a 5- or 7-year ARM at Rivermark. With the 5 year ARM, your rate is locked for five years. After that, the rate can start to adjust based on an index plus a percentage added by the lender. This is called the margin. The 7 year ARM works the same way, with the fixed period lasting for seven years.

To protect you and your finances, lenders cannot send your interest rate into the stratosphere immediately after the fixed-rate period. In fact, there are maximum annual increases and an overall interest cap. Those numbers must be disclosed in your Loan Estimate, which means you can calculate your maximum rate and monthly payments before you ever accept the loan.  

Use Our Online Calculator

The ARM vs. Fixed-Rate Mortgage Calculator is a quick and easy way to determine when to choose an ARM or a fixed-rate loan. 

ARM vs Fixed Rate Calculator

Need an example? Without calculating the down payment, taxes, insurance or points, let’s say the home you want to buy is valued at $350,000. With a 30-year fixed rate loan and a 5.00% interest rate, you’ll pay just under $1,879 per month from the first payment to the last. Because an ARM typically has a lower initial interest rate, let’s calculate it with a 4.00% APR. During the first five years of a 5-year ARM that rate is locked, meaning the monthly payments would be $1,671 per month for five years. You’d save $12,475 by going with the ARM, as long as you sell the home soon after the five-year, fixed-rate period.

While the ARM looks like the clear winner, remember the length of time you plan to live in the home is also a big factor. If you plan to live there 10, 20 or even 30 years, the fixed-rate loan can save upwards of $100,000 in interest payments. 

Talk to Rivermark about Your Options

Our Mortgage Loan Officers can help you decide which option is right for you and your financial future. They can even help you understand what your home will cost beyond the monthly payments. Schedule your appointment, email mortgage@rivermarkcu.org, or call 503.626.6600 or 800.452.8502 Ext. 497.