Adjustable versus fixed-rate mortgages
Get to know the difference between a fixed-rate mortgage and an adjustable-rate, or variable-rate, mortgage. Watch this quick video to hear the pros and cons of both mortgages.
Video Transcript: Adjustable-versus-fixed rate mortgages
- Video duration: 1 minute, 43 seconds
- Transcript date: March 31, 2021
Introduction: Elapsed time 0 minutes 0 seconds [0:00]
If you're buying a home, you're probably wondering, "what's the difference between a fixed-rate mortgage and adjustable-rate mortgage…and which one is right for me?"
Let's take a look at two homebuyers with different needs and break it down.
Fixed-rate mortgages: Elapsed time 12 seconds [0:12]
Homebuyer 1 hopes to stay in this home for a long time and wants the predictability and stability of a payment that doesn't change.
They've chosen a fixed-rate mortgage, which features one interest rate for the life of the loan.
Because the rate stays the same, the principal and interest do, too.
The only thing left for Homebuyer 1 is choose the length of time they'll have to pay off the loan, which is known as the term. Flexible payment terms are available.
Adjustable-rate mortgages: Elapsed time 41 seconds [0:41]
Homebuyer 2 is looking for a home that she may not be in for very long. She's choosing to go with an adjustable-rate mortgage, also known as an ARM.
One popular ARM product is the 5/1 ARM. This means that the interest rate will be the same for the first 5 years of mortgage. After this period, the rate may go up or down depending on market conditions.
Traditionally, the initial rate for an ARM is lower than a fixed-rate mortgage, which can provide for a lower initial monthly payment. However, the rate may increase after the initial fixed period, which means the monthly payment may increase, too.
Summary: Elapsed time 1 minute, 18 seconds [1:18]
To sum it up, fixed-rate mortgages maintain the same interest rate throughout the entire loan period, which is great for those looking to stay in a home for a long time.
Adjustable-rate mortgages or ARMs have lower initial rates that may change over time, which is great for those who are looking to move in a few years.
We hope that you found this information to be helpful.
Description of visual information: [USAA is an Equal Housing Lender USAA is an Equal Opportunity Lender] End of description.
End elapsed time 1 minute, 43 seconds [1:43]
Summary
- Fixed-rate mortgages may offer predictability and stability with an interest rate and a monthly principal and interest payment that don't change.
- One type of Adjustable-Rate Mortgage, or ARM, is a 5/1 ARM, which has a fixed rate for the first five years that's generally lower than a fixed-rate mortgage. After the initial fixed period, the interest rate adjusts annually based on market conditions and your payment could go up.
- Fixed-rate mortgages may be a good option if you plan to stay in your home for a long time. On the other hand, an ARM might be a great option if you plan to move within a few years.
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