A fixed-rate mortgage offers the comfort and security of fixed costs that will not change over the life of the loan. Thirty years is the most popular term for a fixed-rate mortgage. But if you can afford the higher monthly payments, you can save tens of thousands of dollars in interest over the life of the loan by choosing a shorter term of 20 or even 15 years. If you plan to stay in the home for several years, or you expect interest rates to rise significantly over the term of your loan, a fixed-rate mortgage makes sense.
If you plan to stay in your home only a few years, an adjustable-rate mortgage (ARM) could be a better choice. An ARM will have a lower starting interest rate than a fixed-rate mortgage and may help you afford more house at a lower monthly payment – at least initially. But that low initial rate will adjust during the loan term, and if your salary does not keep pace, your affordable mortgage could become a financial strain.
The ARM with the lowest starting, or initial rate will adjust annually – known as a 1/1 ARM. Other popular ARM products will freeze the introductory interest rate for a specified time frame, for example, 3 years, before it begins to adjust annually (a 3/1 ARM). There are 5/1, 7/1 and even 10/1 ARMs available that will all give you a lower starting rate than a fixed-rate mortgage, plus the security of fixed payments for a guaranteed time frame. You can often refinance at the end of the introductory term, but there may be costs associated with the refinance.
Even before you search for the lowest interest rates and fees, you should first consider your budget and time frame which will help you in deciding which mortgage product is best for you.