What's the Difference Between Fixed and Adjustable Rate Mortgages?

  • E 3 Mortgage Corp
May 16, 2022

When the time comes to finance your dream home, you have two options: fixed or adjustable rate. Of course, there are several varieties within these two categories, but let’s break down the differences between your two primary options to help you decide which option is right for you.

Fixed-Rate Mortgages

Once you’ve locked in a fixed-rate mortgage, your total monthly payment never changes. So while your principal and interest rate may fluctuate throughout the mortgage period, your monthly payment is set in stone.

Fixed-rate mortgages protect homeowners from sudden increases in their monthly payments. That predictability makes them attractive, especially for those trying to plan their monthly budget. As far as mortgages, fixed rates are the simplest to understand, and they vary little from one lender to the other.

The Downside of Fixed-Rate Mortgages

If there’s a downside, fixed-rate mortgages are harder to qualify for when interest rates are high. Why? Because monthly payments aren’t as affordable. The good news is that while interest rates are rising, they are still historically low.

The Impact of Fixed-Rate Mortgages of Long and Short-Term Loans

It is worth mentioning that while fixed-rate mortgages lock in interest, the total amount of interest you’ll pay is contingent upon the duration of the loan. In other words, the longer the loan duration, the more interest you pay.

Generally, there are three mortgage term options: 30, 20, and 15 years.

30-year mortgages offer lower monthly payments, which makes them appealing to homeowners. The trade-off, of course, is that, over time, lendees spend the majority of three decades paying off interest rather than the principal. As a result, short-term mortgages feel more expensive upfront, but you’ll save money in the long run.

Adjustable-Rate Mortgages

Adjustable-rate mortgages are attractive because they come with an interest rate set below the market rate of a typical fixed-rate mortgage. However, adjustable-rate mortgages rise in time. So if you hold an adjustable-rate mortgage, anticipate that your low-interest rate will surpass the market rate you’d find with a fixed-rate mortgage.

The good news is that adjustable-rate mortgages are initially fixed. That means your initial interest rate stays constant for a set amount of time. But, of course, that rate depends on the lender. Some offer an initial fixed rate that remains constant for a month, a year, or even ten years.

That fluctuation can make some homeowners anxious because their monthly payment isn't set in stone, which makes it harder to plan and budget.

Why choose an adjustable-rate mortgage?

Adjustable-rate mortgages are worth considering if you take on a shorter-term loan—or those who make a large down payment and plan to pay off the loan before the duration. Adjustable-rate mortgages are also appealing because you may have a lower monthly payment.

The downside of adjustable-rate mortgages

Lenders reward you with a lower interest rate when you choose an adjustable-rate mortgage. Why? Because you’re taking on the risk that your monthly payment might fluctuate over time.

To manage the risk, choose your adjustable-rate mortgage with care. Most have restrictions and caps, which limit interest rates.

E3 Mortgage: Your Mortgage Lending Solution

Whether you decide on a fixed-rate or adjustable-rate mortgage, we can help.  With E 3 Mortgage Corp, your full-service mortgage broker, you can rely on our home loan expertise. Contact us to get started today.