This article is a follow-up to a previously published overview of the different types of home loans available to borrowers in Washington State. Today, we’ll take a closer look at the key differences between adjustable-rate and fixed-rate mortgage loans.
It’s One of Your First (and Most Important) Choices
If you’re planning to apply for a home loan in Washington State, you’ll have to choose between a fixed or adjustable rate. So it’s important to understand the pros and cons associated with each option.
All mortgage rates have interest rates applied to them, and the rate can either be fixed (unchanging) or adjustable. It can even be a combination of the two, as is the case with today’s “hybrid” ARM loans.
So, how do you choose the right mortgage option when buying a home in Washington State? The first step is to understand the unique advantages of each financing option, and to choose the one that best matches your financial goals.
So let’s look at the key differences between fixed and adjustable-rate mortgage loans for Washington home buyers.
Fixed-Rate Mortgage: A Stable Financing Option
Description: A fixed-rate mortgage loan has an interest rate that stays the same, always. It does not change or fluctuate with market conditions, no matter how long you keep the loan. In Washington State, fixed-rate mortgages are available with different repayment term lengths. The 30-year fixed home loan is the most popular financing option among Washington State home buyers and homeowners.
Pros: Payment stability and predictability are the primary benefits of using a fixed-rate mortgage to buy or refinance a home. Because the interest rate stays the same, the monthly payments will largely remain the same as well (though tax-related changes could affect this). This is true for as long as you keep the loan, up to the point that you pay it off, refinance, or sell the home.
Cons: The downside is that you might have a higher interest rate, when compared to the initial rate on an adjustable mortgage. That’s because long-term fixed home loans generally have higher rates than ARMs.
Adjustable-Rate Mortgage: A Money-Saver for the Short Term
Description: An adjustable-rate mortgage (ARM) loan has an interest rate that can adjust or change over time. Usually, the rate will adjust once per year, sometimes after a period of fixed interest that can last for several years. “Hybrid” ARM loans are common these days. They get their name because they start off with a fixed mortgage rate for the first few years, after which the interest rate begins to adjust annually.
Pros: Washington home buyers who use adjustable mortgage loans usually do it to save money. That’s because hybrid ARMs typically start off with lower interest rates than fixed mortgages. They can be a money-saver in the short term, making the well suited for homeowners who plan to move or refinance the home after a few years.
Cons: The downside is that your monthly payments could go up over time, once the rate begins to adjust. That makes the ARM loan less predictable than the fixed-rate mortgage option described earlier.
Best Option for Washington State Home Buyers?
So what’s the best mortgage option for a home buyer in Washington State, fixed or adjustable? This will depend on your financial priorities and your long-term plans.
For example, if you don’t like uncertainty and prefer your monthly payments to stay the same over the long term, a fixed-rate mortgage loan is probably your best option. This is especially true if you think you’ll be staying in the home for many years.
On the other hand, if your top priority is to minimize the size of your monthly payments, you might consider using an ARM loan to secure a lower interest rate. And remember, there’s always the possibility of refinancing into a fixed-rate mortgage down the road, if you choose.
Every Washington State mortgage option has certain pros and cons associated with it, and that goes for the fixed-versus-adjustable question as well. The key is to choose the financing path that works best for you, given your financial goals and priorities.