Adjustable Rate Mortgage (ARM) vs. Fixed Rate Mortgage: Which is Better?

As a homeowner or potential homeowner, you may be wondering, "ARMS vs. Fixed Rate: Which is Better?"  With continuous news of recent foreclosures, a good portion of which are due to ARM adjustments, now more than ever, people are inquiring as to which of these mortgage loans is better.

First, I think we need to explain the difference between the two mortgages, and then we can determine which is better.  A.R.M. is an acronym for Adjustable Rate Mortgage, this type of mortgage has a set number of years in which the rate is fixed or will not change.   Once this period has passed, the interest rate of the note "adjusts" to current market levels at regular intervals for the remaining life of the loan.  Typical ARM types are 2, 3, 5, 7, and 10 years.  A Fixed Rate Mortgage means that the interest rate is "fixed" or will not change for the life of the loan.  The two most typical terms of fixed mortgages are 30 Year and 15 Year. 

In the past, ARM rates were slightly better than the traditional fixed rates, so people would sometimes utilize these loans to get a lower monthly payment.   Over the past couple of years, in the sub-prime mortgage arena, ARM loans were used more and more to qualify credit challenged borrowers. The risk factor of these loans increased as did the number of defaults.  Even more recently as real estate values had declined and sub-prime ARM loans adjusted, many people found themselves owing more than their home was worth, which made these loans even riskier than before.  In the finance world, quite simply, higher risk translates into higher rate, which made rates on the 2 and 3 Year sub-prime ARM increase dramatically.  These rate increases and current real estate market conditions have spilled over into the prime market and have reduced the cost effectiveness of the short term ARM.  The longer term 5 and 7 Year ARM rates have remained aggressively priced to offer consumers an alternative to 30 year fixed rates.  

So, we have a bit more information on what these loans are and what their rate relationship is.  Now, armed with this information, we are READY to determine which loan is better!  RIGHT?  Well...NOT SO FAST!

I don't think the appropriate question is, "Which loan is better?"  I think the more applicable question is, "Which loan is better for YOU?

This is where it gets tricky. It would be absurd for me to tell you what is best for you, your family, or your financial situation, especially if I don't know anything about it!  If you, as a consumer, read an article about which loan is better for you, do yourself a favor, and MOVE ON to another web-page!  If it happens to be a newspaper or magazine article, BURN IT!  The writers of these articles can no better determine which loan is better for you, than an armchair Quarterback can pull himself off his Lazy Boy, drop the Doritos, and win the big game!

The fact of the matter is, according to Freddie Mac, the annual average for age of refinanced mortgages since 2000 is 2.85 YEARS.  That's right, 2.85 YEARS!  That is less than 1/10 the life of the average loan term, which is 30 years!  If you hold your loan for the average amount of time, there should be no reason for you to ever get into a fixed rate loan.  It would be better for you to get into a 5 Year ARM and pocket the savings of the lower payment. BUT, not everyone is "Average"!   People are unique!  Some like the security of a fixed rate loan while others don't mind the risk of an ARM for a lower payment.  These financial viewpoints are yours and yours alone.

As a Mortgage Industry Professional, my function is to present the mortgage options that will best coincide with your unique mortgage ambitions.  What do I mean by mortgage ambitions?   Well, what are your goals for your home?  Is it a starter home?  Are you in an employment position where you may move frequently?  Are you the type that must have stability?  Will you work to pay the mortgage off as soon as possible?   Is this an investment property?  These and so many other questions can help determine these ambitions, but they are questions that only you can answer!   To get these answers, it is best for me to sit down and consult with you.  During this consultation, we will explore as a team what you hope to achieve with your home loan. 

Once we have done this, I will present the options best suited for your particular goals and ambitions.  Next, I will give you the pros and cons of each of option so you are prepared to make an informed decision as to which mortgage loan is best for YOU.  After all, YOU will be borrowing the money, YOU will be making the payments, and the mortgage note will be in YOUR name!  I am just here to help you determine which loan is better for YOU!   It may be an Adjustable Rate Mortgage, or it may be a Fixed Rate Mortgage.  Only YOU can decide!

So when people ask me; "Which loan is better, ARM or Fixed?"

My answer is simply; "The loan that is best for YOU!"

Your mortgage partner for life,