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Fixed or ARM: What Type of Mortgage is Best for You?

By : Marilyn Allena, John Bartolotta, Mary Foster, Barry Gerst, Cheri Krusen, Arthur Reinertsen, Jr., Daniel Tripodi, Ismeal Cortijo, David L. Clough Mortgage Loan Officers, Affinity Federal Credit Union*

If you’re preparing to buy a home for the first time, you might be leaning toward a 30-year fixed mortgage. Why? Possibly because that’s what your parents had, and so you think that’s the ideal type of mortgage. But the reality is a lot has changed over the past generation. Though the length of time the average family has stayed in a home has risen in recent years since reaching a low point just before the late 2000s housing bubble, it currently sits at 8.17 years.1 Furthermore, interest rates have been relatively low since the financial crisis, and recently the Federal Reserve cut rates again to stave off a possible economic downturn.2 Having a fixed-rate mortgage can prevent you from taking advantage of rate cuts to save money during times like these.

moving couple

That said, there are benefits to having a fixed-rate mortgage as opposed to an ARM (adjustable-rate mortgage) if you’re planning on staying in your home for a long time or you worry about your ability to afford sudden interest rate increases. There is no ideal mortgage for everyone, so to find out what’s best for you, ask the following questions:

    • How long will you be living in your house? This isn’t something we all have planned out; many factors impact whether you reside in a home for years or decades, or sell relatively quickly. But having some idea of your intentions is key to deciding whether to get a fixed-rate mortgage or ARM. If you see yourself living in your new house permanently or for the foreseeable future, a fixed-rate mortgage may be right for you, offering as it does long-term stability without having to worry about rate increases that could throw your budget into chaos. But if you plan to sell your house within the next few years, an ARM may be the better option, especially if interest rates are low and trending in that direction.
    • When and how often does the ARM adjust? There is no one type of fixed-rate mortgage or ARM; different providers offer different options. When considering an ARM, you need to look at when it starts to adjust after a period of fixed payments and how frequently it adjusts after that. Typically this happens once per year, but some ARMs can adjust once per month or somewhere in between. This can be too often for some buyers who value stability. But being offered an ARM that adjusts too frequently doesn’t mean you need to get a fixed-term mortgage. Affinity offers multiple options for ARMs as well as rate adjustment caps, guaranteeing your rate won’t ever change more than a pre-determined percentage at each adjustment. It’s possible to combine the benefits of ARMs with some degree of stability.
    • What are the environment and trends for interest rates? We’ve already discussed how interest rates have been relatively low over the past decade. If you have an ARM, a low-rate environment could result in lower payments, while having a fixed-rate mortgage could require you to refinance. But an unexpected or sharp increase in interest rates could harm someone with an ARM, especially if it adjusts frequently and you don’t have a rate adjustment cap. In such a situation, a fixed-rate mortgage (particularly if you took it out during a low-rate cycle like the one we’re in now) would be a definite boon to your finances.

Your ideal type of mortgage depends on your unique circumstances

Choosing between a fixed-rate mortgage and ARM will depend on your answers to these questions and how ready you think you’ll be for the possibility of rate increases. Being able to forecast how much your income will rise (or fall) in the future is also beneficial, as you can figure out how much you will save over time with one mortgage option or another. If you’re an Affinity Federal Credit Union member, you can speak with one of our mortgage loan officers to find out what works best for you.

* Affinity MLO NMLS Information:
Marilyn Allena, NMLS #: 90624
John Bartolotta, NMLS #: 144574
Mary M. Foster, NMLS #: 209810
Barry Gerst, NMLS #: 244987
Cheri Krusen, NMLS #: 1625696
Arthur Reinertsen, Jr., NMLS #: 350399
Daniel "DC" Tripodi, NMLS #: 138251
Ismeal Cortijo, NMLS #: 347019
David L. Clough, NMLD #: 266684

1 Retrieved from https://www.housingwire.com/articles/48946-homeowners-are-staying-put-just-not-for-as-long-as-before

2 Retrieved from https://www.foxbusiness.com/personal-finance/fed-sounds-dovish-note-on-interest-rates-why-you-should-care

This information is for informational purposes only and is intended to provide general guidance and does not constitute legal, tax, or financial advice. Each person’s circumstances are different and may not apply to the specific information provided. You should seek the advice of a financial professional, tax consultant, and/or legal counsel to discuss your specific needs before making any financial or other commitments regarding the matters related to your condition are made.   - See more at: https://www.affinityfcu.com/tips-and-tools/affinity-connect-blog/2017/acronym-101-the-low-down-on-segs.aspx#sthash.HNRlWMk2.dpuf

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