Business_news Fixed-rate mortgages are a better deal right now as adjustable-rate loans become more expensive

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  • Fixed-rate mortgages lock in your rate for the entire life of your loan; adjustable-rate mortgages keep your rate the same for the first few years, then change it periodically.
  • Usually, adjustable rates start lower than fixed rates, so they’ve been good for people who plan to move before the introductory rate period ends.
  • But recently, fixed rates have been going down and adjustable rates have been increasing.
  • Loan officer Darrin English told business Insider homeowners should probably stay away from adjustable-rate mortgages right now.
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When you get a mortgage, you choose between two basic types of loans:a fixed-rate mortgage or an adjustable-rate mortgage.

Fixed-rate mortgageslock in the interest rate for the entire life of your loan.Adjustable-rate mortgageskeep your rate the same for the first few years, then adjust it periodically.

For example, a 30-year fixed-rate mortgage would lock in a rate for the entire 30 years. With a 5/1 ARM, you’d pay the same rate for the first five years. Then the rate would change once per year for the remaining 25 years. 

Usually, the introductory rate for an ARM is lower than fixed interest rates. But that trend has been shifting in recent weeks. Fixed rates have been steadily decreasing, but adjustable rates have been going up. This means ARMs are less beneficial than they used to be.

Business_news ARMs used to charge lower rates than fixed-rate mortgages

Typically, there are pros and cons to both fixed rates and adjustable rates.

Fixed rates have been the better option when you’re buying your forever home, because fixed-rate mortgages are the more stable type of loan. Regardless of whether rates go up or down, you know you’ll pay the same rate for the entire term.

ARMs have been better if you plan to move out of the home before the introductory period ends. This way, you’d pay a lower rate for those few years than you would with a fixed rate, without risking paying a higher rate once the intro period ends.

Business_news Now adjustable rates are increasing, and fixed rates are decreasing

Recently, fixed rates have been steadily decreasing and are atall-time lows. But adjustable rates have been gradually increasing. Now a 5/1 ARM rate could be higher than what you’d pay for a 30-year fixed rate, which hasn’t been the case in a long time.

“Investors really don’t want a 5/1 ARM on their books,” Darrin English, Senior Community Development Loan Officer atQuontic Bank, told business Insider about why the trends are shifting.

That’s becauserates are at historic lows right now, so there’s a decent chance your ARM rate will go up when your introductory period ends. Then you might refinance into a different mortgage with a lower rate, and your original lender risks losing your business after only a few years.

You’re probably less likely to refinance your 30-year fixed-rate mortgage in five years, because it would probably result in a higher rate than what you have now.

English explained that the industry is increasing adjustable rates to discourage homebuyers from getting ARMs. If you get a fixed-rate mortgage instead, then the lender benefits from the increased likelihood of keeping your business until you’ve paid off the loan completely.

Business_news It’s probably not a good idea to get an ARM right now

So, should you get an ARM? Probably not.

“Normally there’s an advantage to a 5/1 ARM,” English said. “There’s a reward, like a lower rate.” 

But now that adjustable rates are increasing while fixed rates stay low, there isn’t much reason to get an ARM.

“I can’t see one good reason why someone would choose to go with an ARM versus a 30-year fixed rate in today’s market,” English said. “Why take the risk when you can get a better rate in a 30-year loan?”

You may want to ask your lender about rates before completely dismissing the idea of getting an ARM. Every lender is different, so it’s worth getting all the information. But if you’re buying soon, you’ll probably save money by choosing a fixed-rate mortgage.

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