If you are currently shopping for a new home, you're probably knowledgeable about the different financing options available. Two types of mortgages, in particular–adjustable-rate mortgages (ARMs) and fixed-rate mortgages–are among the most popular. As you navigate the homebuying process, it will be important to know the difference between these two types of loans. Equipped with unique benefits, each option offers its own distinct set of benefits that can fit a variety of financial needs and goals. ARMs typically provide a lower initial interest rate and the potential for reduced payments if market rates decrease, while fixed-rate mortgages offer consistent payments over the life of the loan. Today on the blog, we'll explore adjustable-rate mortgages vs. fixed-rate mortgages in depth.

What is an adjustable-rate mortgage?
Of the many types of mortgages available, an ARM can provide flexibility to suit many of a homebuyer's needs. One of the primary advantages is the potential for lower initial interest rates, which can result in lower monthly payments during the initial period. This reduced start-up cost can make homeownership more accessible while also freeing up funds for other expenses. During the fixed period, the interest rate does not fluctuate and tends to be shorter in an ARM. This can be helpful for buyers who plan on selling or refinancing their home before the fixed period ends. The lower interest rate, flexible terms, and typically smaller monthly payment all make adjustable-rate mortgages an attractive lending option.

Fixed interest rate mortgages
A fixed rate mortgage also offers many benefits for homebuyers. Rate consistency is a key benefit as borrowers have added security in knowing that their interest rate and monthly payments will remain the same throughout the life of the loan, despite market fluctuations. With a fixed rate loan, borrowers can budget with certainty because they are able to calculate their mortgage expenses for the entire loan term. This can help in simplifying the budgeting process by providing a clear picture of monthly housing costs and helping homeowners in managing their finances over the long-term. 

When it comes to an adjustable-rate mortgage vs. fixed rate mortgage, each option offers distinct benefits. When compared, the primary difference is how interest rate variability is handled. ARM interest rates are usually lower, which can increase homebuyer savings if rates decrease during the adjustment period, but they also carry the risk of higher payments if rates rise instead. A fixed rate mortgage, on the other hand, provides stability and predictability for homeowners, which ensures consistent loan payments, but borrowers may miss out on potential savings if interest rates decrease.

Ultimately, the choice between an adjustable or fixed rate mortgage depends on individual financial goals and what best suits their unique situation. DCCU's RateDrop Mortgage offers the best of both worlds by allowing you to lower your mortgage every 12 months if rates drop. No refinancing or new closing costs are required – just pay a processing fee per rate adjustment. If you are interested in beginning your homebuying journey with DCCU, our Mortgage team is eager to speak with you.

This article is for general information only and not intended to provide specific advice or recommendations for any individual.