One of the biggest decisions you will need to make when you purchase a home is whether to go with a mortgage with a fixed or adjustable rate. Both types of mortgages have benefits and drawbacks, and each is appropriate for different situations.

When Should You Consider a Fixed-rate mortgage?

With a fixed-rate mortgage, your interest will be the same for the lifetime of your mortgage. That is why it is referred to as having a “fixed” rate.

The truth is that most long-term homebuyers should be choosing a fixed-rate mortgage. A fixed-rate mortgage may be more expensive than an adjustable rate mortgage (ARM) initially, but over time, the ARM’s payments will adjust.

If you are going to be living in your Indianapolis home for decades, you want your financial future to be as stable and predictable as possible. With a fixed-rate mortgage, you do not need to worry about your payments soaring out of control. If you can afford them now, you should be able to afford them later as well, assuming your income remains the same or increases.

A lot of folks who lost their homes during the recession found themselves in trouble in part because they chose adjustable rate mortgages when fixed-rate mortgages would have been more suitable for their needs.

While they saved money in the beginning, eventually the interest rates for the ARMs adjusted to the point where they could no longer make their monthly payments. They then fell behind on their mortgages.

When Should You Consider an Adjustable Rate Mortgage?

None of this is to say that adjustable rate mortgages do not have their uses. The main benefit of an ARM is of course that there is an initial fixed-rate period where you can enjoy an introductory rate which is generally significantly lower than the market standard for fixed-rate mortgages.

The timeframe for this fixed-rate period may vary from mortgage to mortgage, but around five years is typical.

After that, you can expect your mortgage rate to rise (in most cases). In some cases, there are restrictions on how quickly the rate can be adjusted upward and how much it can increase each time. There may be a lifetime cap as well.

There are a couple of situations where an ARM would make more sense than a fixed-rate mortgage:

• You are only planning to live in the house temporarily. Perhaps you are on a military tour of duty, or you simply have no plans to stay in the area. Or maybe you plan to upgrade to a bigger house after a few promotions. Regardless, you do not expect to be in the home for longer than the introductory period on the mortgage.
• You are planning on paying off your mortgage in full within a few years—before the adjustable rate period kicks in. Keep in mind that if this is your plan, you should check if there is a prepayment penalty. If there is, make sure that it will not exceed the money you have saved by going with the ARM.

In summary, a fixed-rate mortgage is the best choice if you will be paying off on your home for many years. If you will only be paying on your mortgage for a few short years, an ARM can save you money without compromising your long-term financial stability.

Need Help Figuring Out Which Type of Mortgage Is Right for You?

In some cases, it is easy to determine what type of mortgage makes sense—but a lot of situations are not so cut and dry. If you need help figuring out whether a fixed or adjustable rate mortgage is right for you, then give us a call at (317) 255-0062. We can answer this as well as other questions you may have about mortgages and home purchase.