by Maurie Backman | Jan. 29, 2021
Though adjustable-rate mortgages can save you money in some circumstances, they're not a smart bet right now.
When it comes to getting a mortgage, you have choices. You could sign up for a fixed loan and pay the same amount of interest for its entire duration, or you could opt for an adjustable-rate mortgage, or ARM. With an ARM, you start with one interest rate, but it only stays in place for a limited period of time, and that term depends on the loan you take out. With a 5/1 ARM, for example, you're guaranteed your initial interest rate for five years, but after that, your rate will adjust once each year.
Now, your rate could go down, making your mortgage cheaper over time. But it could also go up, so there's risk involved. In some cases, getting an ARM could save you money, but here are a few reasons to opt for a fixed loan instead.
Often, the benefit of getting an ARM is locking in a really low interest rate on a mortgage -- a rate you won't find with a fixed loan. But today's fixed-rate mortgages are ultra competitive. As of this writing, for example, the average 30-year mortgage rate is 2.856%. That's pretty hard to beat. As such, it pays to lock in a super-low rate and know that you won't run the risk of it adjusting upward over time.
When you sign up for an ARM, you take a gamble that your interest rate will rise in time. Of course, the opposite could hold true, but are you willing to take that chance? If you don't have a lot of wiggle room in your budget, a higher mortgage payment could throw your finances off balance and cause you a world of stress, so you may be better off avoiding that risk altogether.
This is one of the top lenders we've used personally to secure big savings. No commissions, no origination fee, low rates. Get a loan estimate instantly and $150 off closing costs.
Usually, the initial interest rate you'll snag with an ARM is lower than what you'll pay for a fixed-rate loan. In fact, that's largely the appeal of an ARM -- to score a lower rate and enjoy those savings for a period of time. Right now, however, the average ARM rate is actually higher than what you'll see for a fixed loan. As of this writing, for example, the 5/1 ARM is averaging 3.355%. That's actually quite a bit higher than the average 30-year mortgage rate. Since there's no initial discount to be had, an ARM makes little sense.
An ARM can be a useful financial tool for mortgage borrowers under the right circumstances. For example, if you're buying a starter home you plan to sell within a few years and can snag a discounted interest rate on your mortgage with an ARM, then it pays to go that route. Chances are, you'll have unloaded that mortgage by the time your rate has a chance to climb.
But right now, you're better off with a fixed-rate loan, whether it's a 30-, 20-, or 15-year mortgage. All of these fixed-rate products are offering competitive rates, so run the numbers to calculate what monthly mortgage payment you can afford and choose a term that works for you -- without the stress of having to worry what will happen to your loan's interest rate in time.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
Our expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See our full advertiser disclosure here.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.