Adjustable Rate Vs Interest Rate

803 Words 4 Pages
Fixed-Rate Versus Adjustable-Rate Mortgage Loan
Donald Douglas Nicholson
Post University When looking to purchase a house, buyers must first consider which type of mortgage loan is right for them. A fixed-rate mortgage and an adjustable-rate mortgage (ARM) loan are two of the most popular options. According to the Consumer Financial Protection Bureau (CFPB), “fixed-rate mortgages, the interest rate is set when you take out the loan and will not change. With an adjustable rate mortgage, the interest rate may go up or down” (CFPB, 2016, para.1). Though they have a few similarities, the two loans are mostly different. Rather it is the difference in the interest rate, the monthly payments, or the total amount of interest paid; fixed-rate and
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A 5/1 ARM simply means that for the first 5 years of the loan, the rate will be fixed. After that (in this example) the rate will increase by .25% annually for the remainder of the 30 year loan. With a starting interest rate of 3.5%, the monthly payments will be the same as with the fixed-rate mortgage, $1,023.82; however, after the first 5 years, payments will increase along with the interest rate. The highest monthly payment increases to $1,452.10 and the interest rate increases from 3.5% to 9.75% over the 30 year duration of the loan. The total amount of interest that will be paid to the lender is $223,932.93, and the total amount paid at the end of the 30 years is $451,932.93. An ARM is good for someone looking to start with low payments, or someone that may need to relocate often. ARMs can end up being too expensive for borrowers. In the example used here, the monthly payments grow from $1,023.82 all the way to $1,452.10. Because of this, the total amount paid throughout the life time of the loan is $83,357.73 more than the fixed-rate mortgage. An ARM is a great loan for those looking for an initial low monthly …show more content…
Both mortgages offer benefits to the borrower; however, the fixed-rate mortgage is the better selection if looking to settle down and make a long term investment due to its consistency with payment amounts. Rather an individual prioritizes having a fixed interest rate, low initial monthly payments, short term homeownership, or a long term investment to settle down and raise a family; fixed-rate and ARM loans are two of the many lending options one might use to purchase a home. References
Bankrate.com. (2005, April 1). MORTGAGE BASICS: ARM vs. fixed-rate mortgage. Retrieved from http://www.bankrate.com/finance/mortgages/arm-vs-fixed-rate-mortgage-1.aspx
Consumer Financial Protection Bureau. (2016). What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan? Retrieved from http://www.consumerfinance.gov/askcfpb/100/what-is-the-difference-between-a-fixed-rate-and-adjustable-rate-mortgage-arm-loan.html
Realtor.com. (2016). Home For Sale – Active. 984 Rays Bridge Rd. Retrieved from

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