What are the advantages and disadvantages of Fixed-Rate Mortgage and ARM? Which is more suitable for you?
Fixed-Rate Mortgage
Traditional lending institutions offer fixed-rate mortgages for a variety of terms, the most common of which are 30 and 15 years. The monthly loan interest rate would be stable and the same in the following 30 or 15 years regardless of future market interest rate fluctuations.
Advantages
1. Interest rates and monthly payments remain stable
2. Steady repayment can make your financial planning easier.
Disadvantages
1. Interest rates and upfront costs would be higher than ARM
2. If the market rate continues to fall, your fixed rate is relatively higher.
This type of loan is recommended for people who are stable and conservative and will not move in the following 5-10 years. It is also suitable for the elderly who is retired and have stable retirement pension.
ARM (Adjustable-Rate Mortgage)
In terms of time, the common types of ARM are 3/1, 5/1, 7/1 and 10/1. With an ARM, the initial interest rate is fixed for a period of time. After this initial period of time, the interest rate resets periodically at yearly or even monthly intervals. For example, 3/1 means that the interest rate remains unchanged in the first three years of the total repayment time, and the interest rate for each year after three years will be adjusted according to the market interest rate level. Similarly, 5/1 means that the interest rate is fixed in the first five years of the total repayment time, and the subsequent interest rate varies according to the market interest rate. Generally speaking, the 5/1 and 7/1 ARM is more popular. Normally, the interest rate will be 0.125-0.25% lower,or even more, than the 30-year fixed-rate mortgage.
Advantages
1. Initial interest rate is lower, so is early monthly payment.
2. You can get a relatively higher loan amount so that you can get a better house with higher price.
3. If you are lucky, lower market interest rates after the initial period will reduce your repayment.
Disadvantages
1. ARM calculation method is relatively complex. Borrowers would fell too complicated for those who are not familiar with the loan business.
2. There is a certain risk in the interest rate. If market interest rates rise after the initial period, the monthly repayment will suddenly increase.
This type of loan is more suitable for people who is adventurous or may be moving in the next few years. We suggest that borrows can also choose to refinance to ease the pressure of higher monthly payments, if the market interest rate rise after the initial period.
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