If you’re house hunting, you’ve probably heard the terms “fixed-rate” and “adjustable-rate” tossed around by real estate professionals. But what exactly do they mean? And how will these terms impact your mortgage experience? Let’s break it down in simple language here!

What’s the Difference Between Fixed- & Adjustable-Rate Mortgages?

Fixed-Rate Mortgages

If you prefer more predictability in your financial life, you’ll appreciate fixed-rate mortgages. Once you’ve locked in your interest rate, it stays the same for the duration of the loan—whether it’s 5, 15, or 30 years. Likewise, your monthly principal and interest will stay the same, no matter how the economy swings.

Adjustable-Rate Mortgages

Unlike fixed-rate mortgages, adjustable-rate mortgages change over time. They typically start with a lower interest rate for the first 5-10 years of repayment. However, once that initial period ends, your rate can go up or down depending on the market.

What’s Better, a Fixed- or Adjustable-Rate Mortgage?

Fixed-Rate Mortgages: The Benefits

• Predictability: The primary benefit of fixed-rate mortgages is that your monthly mortgage payment won't change. Your payment might increase slightly if property taxes or homeowners' insurance premiums rise (since these are typically bundled with your monthly payment). However, the actual mortgage portion, which includes your principal and interest, will stay the same for the duration of your loan.
• Easier to compare options: If you’re a deal shopper and looking for the lowest interest rates possible, comparing fixed-rate mortgages is much easier. Why? Adjustable-rate mortgages have many moving parts, including the initial rate, adjustment periods, and rate caps. With a fixed-rate mortgage, you simply compare one number.

Fixed-Rate Mortgages: The Limitations

• Higher interest rates: Fixed-rate mortgages generally start with higher interest rates than adjustable-rate mortgages. Basically, you are paying more for long-term stability. From our perspective, that cost is well worth it, particularly for homeowners who plan to stay in their homes for many years or others who want to know exactly what their mortgage payment will be in the future.
• Less flexibility: If interest rates fall drastically, which is unlikely anytime soon, you're stuck with a higher interest rate unless you refinance or sell your home. However, it is worth noting that with adjustable-rate mortgages, rates typically increase once the initial period ends—often dramatically.

Adjustable-Rate Mortgages: The Benefits

• Lower monthly payments, initially: Homebuyers are often drawn to adjustable-rate mortgages for the lower monthly payments. Just keep in mind that once the introductory rate expires, your monthly payments will change.
• More buying power: With a lower initial interest rate, you may be able to afford a more expensive home. Just keep in mind that costs may increase after the introductory repayment period. If you're stretched financially in the beginning, payments may become unaffordable once your rate adjusts.
• More flexibility: If interest rates drop, your monthly payment will likely go down, which means you don’t have to refinance to receive a better rate.

Adjustable-Rate Mortgages: The Limitations

• Less predictability: After the initial fixed-rate period expires, interest rates will change. Whether your monthly payment goes up or down depends on the market.
• More complex: While fixed-rate mortgages are fairly straightforward, adjustable-rate mortgages involve multiple moving parts, making them difficult to understand. And more difficult to compare from lender to lender.
• Refinancing challenges: If rates rise substantially and property values decline, borrowers might have difficulty refinancing into a fixed-rate mortgage.

Factors to Consider When Choosing a Loan

When choosing between a fixed-rate versus adjustable-rate mortgage, consider your:

• Long-term goals: If you plan to stay in your home for many years, a fixed-rate mortgage provides more stability. If you expect to move in a few years, it may be worth exploring an adjustable-rate mortgage.
• Personal finances: How comfortable are you with the prospect of your monthly payment going up? If you want to make budgeting easier, fixed-rate mortgages are likely the best option.
• Market conditions: When rates are historically low, locking in a fixed rate can protect you from future increases. When rates are high, you may want to weigh whether an adjustable rate could benefit you if rates decline.
• Risk tolerance: If you have the financial flexibility to handle potential payment increases, you may benefit from taking a calculated risk with an adjustable-rate mortgage.

Our Take On Fixed-Rate Versus Adjustable-Rate Mortgages

At JustChoice Lending, we only offer fixed-rate mortgages, and here’s why:

• Our clients prefer stability: We believe clients deserve the security of knowing exactly what their mortgage payment will be for the duration of their loan terms. In the event that interest rates do drop dramatically, we offer many refinancing options.
• We value transparency: With fixed-rate mortgages, you get one rate and one payment for life. Experience shows us that this transparency helps our clients make more informed decisions.
• We put your security first: We want our clients to feel confident about their financing decisions—without worrying about potential payment shocks or market fluctuations affecting their monthly payments. In general, the clients we work with need predictable financing that makes sense for the long haul.

We’re Fixed On Your Long-Term Success!

Looking for competitive fixed-rate loans built around your lifestyle and financial situation? You’re in the right place. As a local-first, non-commission-based lender, the JustChoice Lending team offers numerous loan programs, including USDA, VA, FHA, and conventional loans. We're committed to finding you the right fixed-rate mortgage that aligns with your goals and budget. Contact us today!