Fixed vs. Adjustable—Which Mortgage Rates Are Better?

Many home buyers are asking this question right now as mortgage rates have continued to rise steadily throughout 2022. Is it still better to get a 30-year fixed-rate loan or should you explore adjustable-rate mortgage (ARM) (also known as variable-rate mortgages) options?

When rates were at historic lows in recent years, there was no reason not to get a traditional fixed-rate loan. You could lock in the same low interest rate for the entire length of your mortgage loan. However, ARMs have started to gain more popularity again with higher fixed rates. More mortgage lenders are offering adjustable-rate home loans as an alternative to fixed-rate mortgages. 

Which loan type will give you the best mortgage rate may depend on a number of different factors. Mortgage lending is never a one-size-fits-all prospect. Your lender will review your financial standing, how much you want to borrow and market conditions to help you find the most beneficial mortgage loan solution. At least, that’s what a good mortgage lender or mortgage broker will do for you. If you are only showing you limited options or it seems like they are forcing you into one specific mortgage product, you may want to look elsewhere and shop around before locking yourself into a bad home loan.

Getting back to the original question of fixed vs. adjustable mortgage, here are a few items for you to consider:

mortgage rates

Fixed-Rate Mortgage Advantages

The main advantage of a fixed-rate mortgage loan is that you have one interest rate locked in for the entire life of your loan. If prevailing mortgage rates go up further, you won’t be paying any more interest in your monthly mortgage payments. Most homeowners prefer this consistency because it offers at least some peace of mind. There won’t be any future surprises with a fixed-rate loan. 

Fixed-Rate Mortgage Disadvantages

The only real disadvantage with a fixed-rate loan is that you are locked into a certain interest rate. The real estate and mortgage market could shift dramatically in the future and rates could drop again. Mortgage rates tend to be fairly cyclical in nature and are driven by the current real estate market trends and other national economic factors (treasury bond yields, Fed rate, etc.). When mortgage rates drop well below what you are currently paying, you may find yourself feeling a little envious of new home buyers.

However, it’s not the end of the world. If mortgage rates do drop significantly in the future (and/or your financial situation improves greatly to allow you to qualify for a better fixed interest rate), you can always consider a home loan refinance. This can allow you to lock in an even lower rate. You may be able to lower your monthly mortgage payments or shorten the term of your loan.

Adjustable-Rate Mortgage Advantages

ARMs become more popular during high-mortgage-rate periods because there is hope inspired by the natural economic cycle. What goes up must come down, right? An adjustable-rate home loan will have an interest rate that is adjusted periodically based on prevailing average mortgage rates and other economic factors. The benefit is that your interest rate will automatically go down if the national mortgage rates drop in the future. This will decrease your monthly mortgage payments if this happens. Your mortgage rate will go up and down based on what’s happening in the market.

Adjustable-Rate Mortgage Disadvantages

Unfortunately, there is no guarantee that the rates will come down significantly. They may go up even higher or, in most cases, they will go up and down over the course of your 30-year loan. You will have periods when you are paying more and some where you are paying less. It may average out the same as a fixed-rate loan when all is said and done. Or, it could end up being slightly higher or lower. It’s a bit more of a gamble with an ARM. Some home buyers are happy to take this gamble while others feel more secure with a fixed-rate mortgage.

Again, you can always consider a mortgage refinance in the future if the mortgage rates drop significantly or your financial situation improves greatly. You may have an adjustable-rate mortgage for now, but refinance with a fixed-rate loan later when the timing is right. Some mortgage lenders may even allow you to switch to a fixed rate without having to completely refinance the loan. 

Talk with your mortgage lender. Understand your home loan options and see which mortgage solution(s) will be best for you as a home buyer. If you are buying a home in the Atlanta area, contact Moreira Team today to get started.