3 Questions To Ask Yourself Before Switching To A Fixed Rate Mortgage

questions ask before switching ARM to fixed rate mortgage

Predictability with regards to your finances is one of the most appealing features of having a fixed rate mortgage. However, many are still wondering if sticking to an adjustable rate mortgage (ARM) is more beneficial in the long run. Both of these mortgage types offer unique pros and cons. As someone aiming to make mortgage payments more painless and manageable, your ultimate goal is to choose the most suitable one.

The Differences between ARM and Fixed Rate

Before you go through the questions, what exactly are the differences between an ARM and a fixed rate mortgage (FRM)? Check out a quick comparison below on these types of mortgages:

Fixed Rate Mortgage

  • Interest rates will remain the same regardless of market changes
  • Typically comes in both 15-year and 30-year loan terms
  • Greater stability because of unchanging interest rates

Adjustable Rate Mortgage

  • Offers lower introductory interest rates compared to a fixed rate mortgage
  • Typically only comes in a 30-year loan term
  • Less stability due to changing interest rates

Comparing the differences in the interest rates between an ARM and a fixed rate mortgage is difficult because no one can accurately predict rate fluctuations in the next few decades. However, you can calculate the difference if you’ll only refer to the introductory period of the ARM and assess it together with the corresponding fixed rate mortgage interest rates. Based on the 2021 report of median sales prices of U.S. households, there is a significant gap in interest rates and actual payments between these two mortgage types even during the introductory period.

Questions to Guide You in Your Decision

You may already be scratching your head with all of the considerations you need to go through. Thankfully, you don’t have to go through it alone. With the help of a top-ranked mortgage broker, you’ll breeze through these questions and make up your mind faster.

#1 Is My ARM Rate Resetting Soon?

An ARM’s interest rate starts relatively low for a predetermined period compared to a fixed rate mortgage. However, once this period ends, the interest rate will periodically adjust to the ARM rate currently set by your lender. You will see these terms and other pertinent details in your loan documents. 

One example of an ARM rate progression is 5/1 – this figure means your ARM’s interest rate will stay the same for five years, but it will be adjusted every year afterward. Are you willing to go through such changes every year or so? If not, a fixed rate mortgage is ideal.

#2 Am I Aiming for More Stable Payments?

ARMs come with payment and adjustment caps, which means the interest rates won’t go beyond a certain amount. However, not everyone is comfortable dealing with such uncertainty, especially if other major expenses must be paid regularly.

A fixed rate mortgage has a higher interest rate than an ARM during the introductory period. Fortunately, there’s a sense of certainty and predictability in monthly payments because the rates won’t change until the end of the loan term. Of course, that is until you choose to refinance. If you do opt to refinance your home, you can check out the best refinancing rates, then seek the recommendations of a reputable mortgage broker.

#3 How Long Do I Plan to Stay in My House?

Mortgage experts say that a fixed rate mortgage works well for homeowners who plan to stay in their current residence for an extended period. However, an ARM is more suitable for those not planning to stay beyond a few years. Refinancing to a fixed rate mortgage is advisable if you’ve already found a place you plan to own for at least a few decades.

Closing costs during refinancing can reach up to 5% of your property’s outstanding principal. All of the costs associated with refinancing mortgages will add up and can prove to be quite a hefty financial burden for some. Before making the switch, make sure you regain any closing costs within 36 months after refinancing your ARM to a fixed rate mortgage.

Make the Decision Today with the Help of an Experienced Mortgage Broker

You’ve likely been reading multiple guides and making several calculations on the pros and cons of switching to a fixed rate mortgage. It can be an overwhelming endeavor, especially if it’s your first time doing it. Whether it’s your first, second, or third attempt – or how many times you’ve done it before – it’s best to tap into the expertise of the best mortgage broker San Diego residents can find in today’s challenging housing market.