Choosing Your Home Loan: Fixed Rate or Adjustable Rate Mortgage?

Loan to buy a house, pressure to buy a house

When it comes to getting a mortgage, you have to consider the type of loan. Adjustable-rate loan mortgages (ARMs) and fixed-rate mortgages are the two main types of loans. The initial low rates of adjustable-rate loan mortgages can make them appealing, but everything comes with pros and cons. And similar is the case with fixed-rate mortgages. Below are the pros and cons of fixed-rate and adjustable-rate mortgages that will help you make the right decision.

Adjustable rate mortgage

Interest rates change periodically in adjustable-rate mortgages, and they are typically lower than a fixed-rate mortgage for a few years. Adjustable rate mortgage starts with a fixed interest rate for a particular period, commonly from 3 to 10 years. So, during this period, homeowners pay predictable monthly payments according to the interest rates, providing stability. After the initial period ends, the interest gets adjusted after a fixed time, which is generally after one year or a few years. So, if the rate increases, your monthly payments will rise; And if the rate decreases, your monthly payments will decrease.

Adjustable rate mortgage benefits

  • One has to pay lower payments during the initial fixed-rate period, which means borrowers can qualify for lower interest rates for an expensive home.
  • By buying a residential property in Mohali with ARM for the purpose of selling, you can enjoy the benefits of saving money in the first few years without committing to pay fixed monthly payments all your life.
  • ARMs can help borrowers save more money, which they can put into other investments to increase their earnings if interest rates keep declining in the future. 

Adjustable rate mortgage drawbacks

  • Interest rates can rise over time, making you pay more than your previous payments.
  • ARM is more complex than a fixed-rate mortgage as one needs to understand things such as index, margin, etc.
  • It makes long-term financial planning difficult, as interest rates are unstable, and one can’t predict the rise or fall of rates in advance.

Fixed-rate mortgage

As the name suggests, in a fixed-rate mortgage, borrowers have to pay the same interest throughout the life of the loan. These loans are popular because they are predictable and stable but come with high-interest rates.

Fixed-rate mortgages are perfect for those who want to stay in their homes for an extended period. As interest rates in FRM are known, one can manage his finances accordingly. Also, they don’t need to worry about the increase in interest rates.

Fixed-rate mortgage benefits

  • Fixed-rate interest rates and payments remain constant.
  • Fixed monthly payments make it easier for homeowners to budget.
  • Unlike adjustable-rate mortgages, fixed-rate mortgages are not complex. A first-time buyer can easily understand fixed-rate mortgage interest rates and monthly payments.

Fixed-rate mortgage drawbacks

  • Fixed-rate mortgage interest rates are higher as compared to adjustable-rate mortgages, which means you have to pay high monthly payments.
  • You can’t save money on the payments if the interest rates decrease. While in ARM, you will get the chance to take advantage of lower interest rates.

Fixed-rate vs. adjustable-rate mortgage

Which one will be the perfect financial choice for you depends on your personal goals, financial situation and risk tolerance. For example, a fixed-rate mortgage can be good for you if you are planning to buy a home in which you will settle down for the long term. FRM makes budgeting easier, as buyers know how much they need to pay each month. Also, if you buy a home/property when there are low-interest rates, you can save thousands of rupees. Similarly, an adjustable-rate mortgage may be good for you if you are buying a home for the short term because it will allow you to build equity along with saving money that you can use to buy your dream house. You can consult a financial advisor or a real estate agent in Mohali to decide which type of loan will align with your requirements.

The bottom line

You can finance your home purchase through an adjustable-rate or fixed-rate mortgage. While fixed rates are costly, they are predictable, meaning your monthly payments will remain the same. This makes them ideal for those who want stability in their life and budget. Adjustable rate mortgages come with low-interest rates for a fixed period, making them perfect for those not planning to stay long. Overall, we may conclude that a number of criteria, including your housing demands, budget, and other factors, can influence your choice.

Join The Discussion

Compare listings