Fixed-Rate, ARM, or Interest Only: Which is Best?

Borrowers have more loan options today than ever before. Conventional loans like the 30 year fixed-rate loan are easy to predict, ARMs seem easier on the pocket, and interest only loans are attractive for their low monthly payments. So which one is right for you? Each has unique advantages over the others, but they are not all created equal. Choose the wrong one and it could cost you a lot of money over the life of your loan.

Fixed-rate loans: conventional fixed-rate mortgages are the choice for most buyers today who plan to stay in their home for more than a few years. Payments are amortized over the life of the loan, which makes the budgeting process a whole lot simpler. You are also protected from the negative effects of inflation, unlike ARMs, because your rate is fixed. Although the fixed-rate loan can be more expensive starting out, it can save you money down the road as you pay off your principle.

Adjustable Rate Mortgage: ARMs are easier to afford for many borrowers because they start with interest rates that are lower than fixed-rate loans. These lower rates equate to extra borrowing power, which make them so attractive to many. As the loan matures, however, this advantage disappears and the interest rate is adjusted to reflect current market rates. As rates rise, so will your mortgage payments. As rates fall, your payments fall as well. Although there are caps in place to keep the rates from rising too high, ARM’s can present uncertainty in your year-to-year budgeting. These loans are ideally suited for buyers who need a low initial rate and who don’t have long term plans to take the loan to maturity.

Interest only loans: Interest only loans allow you to maximize your purchasing power by paying interest only on your loan amount. These loans usually require a balloon payment to repay the principle, usually within five to seven years. These loans are best when used in areas of high appreciation, or when your money might be better invested in other opportunities. Because these loans can be paid down throughout their lifetime, borrowers have a good deal of discretion on how quickly they repay the principle. Interest only loans offer borrowers a great deal of flexibility.

Each of these programs can save you money over time depending on your plans. Contact us when you are ready to consider the options – we’re here to help!