SmartipediaShould I choose a fixed or variable rate mortgage?
Buying a home is a huge financial decision, and choosing the right mortgage can save (or cost) you thousands of dollars over the years. But how do you decide between a fixed or variable rate mortgage? Let’s break it down in a way that’s easy to understand.
What’s the Difference?
Fixed Rate Mortgage: With a fixed rate, your interest rate stays the same for the entire term of the loan, usually 15 or 30 years. This means your monthly payments won’t change, no matter how interest rates fluctuate in the market.
Variable Rate Mortgage: Also known as an adjustable-rate mortgage (ARM), a variable rate means your interest rate can go up or down periodically, based on market conditions. Your monthly payments will change accordingly.
Pros and Cons
Fixed Rate:
- Stability: You know exactly what your payments will be, making budgeting easier.
- Protection: If interest rates rise, you’re locked into the lower rate.
- Downside: If rates drop significantly, you’ll miss out on potential savings.
Variable Rate:
- Potential Savings: If interest rates fall, your payments will too.
- Upfront Affordability: ARMs typically start with lower rates than fixed-rate mortgages.
- Risk: If rates rise, your payments could become unaffordable.
Surprising Insights
🤯 Did you know that the interest rate on a 30-year fixed mortgage has averaged around 8% over the past 50 years? Today’s rates are historically low, making fixed-rate mortgages especially attractive.
🤔 ARMs often come with caps that limit how much your rate can increase or decrease over the life of the loan. But even with caps, your payments could still fluctuate significantly.
💰 Over the past 20 years, homeowners with fixed-rate mortgages have paid an average of $135,000 more in interest than those with ARMs. But remember, past performance doesn’t guarantee future results.
The Bottom Line
The right choice depends on your personal circumstances and risk tolerance. If you value stability and can afford the higher initial payments, a fixed-rate mortgage may be the way to go. But if you’re comfortable with some uncertainty and think rates may drop, an ARM could save you money in the long run.
Learn More
- Mortgage Points: Upfront fees that can lower your interest rate. Worth it?
- Mortgage Insurance: When you need it and how to avoid it.
- Refinancing: When and how to refinance your mortgage for better terms.