Non-Conforming Loan Comparison: Adjustable-Rate Mortgage Versus Fixed Rate Mortgage

Not all mortgage loans are the same, and choosing the wrong type can lead to potential issues if not carefully considered. For instance, adjustable-rate mortgages (ARMs) and fixed-rate mortgages offer different features and risks.

The type of mortgage you qualify for often depends on your credit history. Your FICO score, which is a credit score calculated by Fair Isaac Corporation using a specific formula, plays a significant role in determining the loan options available to you.

GMAC highlights the differences between fixed-rate and adjustable-rate mortgages. A fixed-rate mortgage offers a stable interest rate throughout the life of the loan, resulting in consistent monthly payments. In contrast, an adjustable-rate mortgage (ARM) features an interest rate that fluctuates at regular intervals, typically annually, based on a market index. ARMs often have an initial fixed-rate period, which can last from three months to ten years, after which the rate adjusts.

Despite the variability in rates with ARMs, they can be advantageous in certain situations. ARMs usually offer lower initial interest rates compared to fixed-rate mortgages, potentially increasing your buying power and saving money if interest rates remain stable or decrease.

According to Bankrate.com, a fixed-rate mortgage (FRM) provides predictable monthly payments, whereas an ARM offers a lower initial rate that adjusts after the initial period. Common ARMs include options like 1/1, 3/1, 5/1, 7/1, and 10/1, where the initial rate is fixed for a specified period before adjusting annually.

In general, a fixed-rate mortgage is ideal if you plan to stay in your home long-term and secure a low interest rate at the time of purchase. Conversely, an adjustable-rate mortgage may be suitable if you intend to move within a few years and face higher initial rates.