This week, Quicken Loans Chief Economist Bob Walters discusses the differences between adjustable rate mortgages and fixed rate mortgages. With current mortgage rates at historic lows, it’s more important than ever to really understand your options before you buy a home or refinance. Take it away, Bob!
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Video Transcription:
Deciding whether to take a fixed rate mortgage or an adjustable rate mortgage is a very important part of the mortgage process. A good mortgage banker will take you through the pros and the cons of each.
A fixed rate mortgage is exactly like it sounds. It’s a mortgage where the interest rate is fixed for a certain period of time. Maybe it’s 10 years, maybe it’s 15 years, maybe it’s 30 years – but for the entire length of that mortgage that interest rate won’t change. That appeals to a lot of people. It gives them certainty.
An adjustable rate mortgage has two components. The first component is the fixed component. The interest rate is fixed for a certain period of time. That can be as short as six months or as long as ten years. But then, they all begin to adjust after that fixed period. They adjust up and down with the market.
Why would someone take an adjustable rate mortgage when they could have the certainty of a fixed? The answer is pretty simple: most adjustable come with a lower interest rate than the fixed interest rate, so there’s a benefit. There’s interest rate savings by taking that adjustable rate. For example, for folks who might be moving in 5 years, first time home buyers who often are moving up, or will transition or get married or have children – those folks might strongly consider an adjustable rate mortgage as well and take those savings.
We in the industry know a couple of things. We know the average American moves every 9 years. We also know that the average 30-year fixed is only on the books about 5 or 7 years before people move or refinance. So paying for 30-year money, which is more expensive, often times doesn’t make sense - especially when a person is in a situation where it is highly likely that they will be in a new mortgage sometime in the future. For those people who are very conservative and almost certain that they are going to be in the home for a long period of time, maybe a fixed mortgage makes a lot of sense. But working with a good mortgage banker to understand the pros and cons & to match your situation with the right mortgage product is very, very important.
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