Adjustable Vs Fixed Rate Mortgage Comparison Worksheet
Introduction
When it comes to choosing a mortgage, one of the most important decisions you'll need to make is whether to go for an adjustable rate mortgage (ARM) or a fixed rate mortgage. Both options have their pros and cons, and it's crucial to understand the differences between them before making a decision. To help you with this, we have created a comprehensive adjustable vs fixed rate mortgage comparison worksheet that will guide you through the process of evaluating these options.
What is an Adjustable Rate Mortgage (ARM)?
An adjustable rate mortgage (ARM) is a type of mortgage where the interest rate can change periodically. Typically, the interest rate is fixed for an initial period, usually 3, 5, 7, or 10 years, and then adjusts annually based on a specific benchmark such as the London Interbank Offered Rate (LIBOR) or the U.S. Treasury index. The adjustment is usually based on a predetermined margin, which is added to the benchmark rate.
What is a Fixed Rate Mortgage?
A fixed rate mortgage is a type of mortgage where the interest rate remains constant throughout the life of the loan. This means that your monthly mortgage payment will remain the same, regardless of any changes in the market interest rates. Fixed rate mortgages are typically available for terms of 15, 20, or 30 years.
Pros and Cons of an Adjustable Rate Mortgage
Pros:
1. Lower initial interest rate: The initial interest rate on an ARM is usually lower than that of a fixed rate mortgage. This can result in lower monthly mortgage payments during the initial fixed rate period.
2. Flexibility: ARMs offer more flexibility as you can take advantage of falling interest rates if the market conditions are favorable.
3. Higher borrowing capacity: Since the initial monthly payments on an ARM are lower, you may be able to qualify for a higher loan amount compared to a fixed rate mortgage.
Cons:
1. Risk of rate increases: The main disadvantage of an ARM is the uncertainty of future rate increases. If interest rates rise, your monthly mortgage payments will increase as well.
2. Budgeting uncertainty: With an ARM, your monthly mortgage payment can fluctuate, making it difficult to budget for future expenses.
3. Limited predictability: Unlike a fixed rate mortgage, you won't know what your interest rate and monthly payment will be after the initial fixed rate period ends.
Pros and Cons of a Fixed Rate Mortgage
Pros:
1. Stability: The main advantage of a fixed rate mortgage is stability. Your interest rate and monthly mortgage payment will remain the same throughout the life of the loan, providing predictability and ease of budgeting.
2. Protection against rate increases: With a fixed rate mortgage, you are protected against future rate increases. Even if interest rates rise, your mortgage payment will remain unchanged.
3. Peace of mind: Knowing that your mortgage payment will not change gives you peace of mind and financial security.
Cons:
1. Higher initial interest rate: Compared to an ARM, fixed rate mortgages usually have higher initial interest rates, which can result in higher monthly mortgage payments.
2. Limited flexibility: With a fixed rate mortgage, you won't be able to take advantage of falling interest rates unless you refinance your loan.
3. Potentially higher overall interest costs: If interest rates decrease significantly in the future, you may end up paying more in interest over the life of the loan compared to an ARM.
Using the Adjustable vs Fixed Rate Mortgage Comparison Worksheet
Our adjustable vs fixed rate mortgage comparison worksheet is designed to help you evaluate the two options and make an informed decision. Here's how to use it:
Step 1: Fill in your loan details
Start by filling in the loan details section, including the loan amount, loan term, initial interest rate, and annual adjustment cap for an ARM, or the interest rate for a fixed rate mortgage.
Step 2: Compare monthly payments
Next, compare the monthly payments for both the ARM and fixed rate mortgage options. The worksheet will calculate the monthly payment for the initial fixed rate period for the ARM and the monthly payment for the fixed rate mortgage.
Step 3: Evaluate the adjustable rate mortgage
If you are considering an ARM, evaluate the potential changes in your monthly payment based on different interest rate scenarios. The worksheet will show you how your monthly payment may change over time.
Step 4: Consider your financial goals
Think about your financial goals and how long you plan to stay in the house. If you plan to sell or refinance before the initial fixed rate period ends, an ARM may be a good option. However, if you plan to stay in the house for a longer period, a fixed rate mortgage may provide more stability.
Step 5: Compare overall interest costs
Finally, compare the overall interest costs for both options. The worksheet will show you the total interest paid over the life of the loan for both the ARM and fixed rate mortgage.
Frequently Asked Questions (FAQ)
1. What is the difference between an adjustable rate mortgage and a fixed rate mortgage?
An adjustable rate mortgage (ARM) has an interest rate that can change over time, while a fixed rate mortgage has a constant interest rate throughout the life of the loan.
2. Which option is better, an ARM or a fixed rate mortgage?
The choice between an ARM and a fixed rate mortgage depends on your financial goals, risk tolerance, and how long you plan to stay in the house. It's important to evaluate the pros and cons of each option and consider your personal circumstances before making a decision.
3. What is the initial fixed rate period for an ARM?
The initial fixed rate period for an ARM is typically 3, 5, 7, or 10 years, during which the interest rate remains constant.
4. Can I refinance my mortgage if I have an ARM?
Yes, you can refinance your mortgage if you have an ARM. Refinancing allows you to replace your current mortgage with a new one, potentially at a lower interest rate or with more favorable terms.
5. How often does the interest rate on an ARM adjust?
The interest rate on an ARM typically adjusts annually after the initial fixed rate period ends.
6. Can I convert my ARM to a fixed rate mortgage?
Some lenders offer options to convert an ARM to a fixed rate mortgage at certain points during the loan term. However, this may come with additional fees and requirements.
7. Are there any penalties for paying off a fixed rate mortgage early?
Some fixed rate mortgages may have prepayment penalties if you pay off the loan before a certain period. It's important to review the terms of your mortgage agreement to determine if there are any prepayment penalties.
8. How can I compare the overall cost of an ARM and a fixed rate mortgage?
You can compare the overall cost of an ARM and a fixed rate mortgage by looking at the total interest paid over the life of the loan. Our adjustable vs fixed rate mortgage comparison worksheet can help you with this calculation.
9. Can I switch from a fixed rate mortgage to an ARM?
It is possible to switch from a fixed rate mortgage to an ARM through a process called refinancing. However, this decision should be carefully considered, taking into account your financial goals and the current market conditions.
10. Can I lock in an interest rate for an ARM?
Some lenders offer options to lock in an interest rate for an ARM, which can provide some protection against future rate increases. However, this may come with additional costs and requirements.
Tags
adjustable rate mortgage, fixed rate mortgage, mortgage comparison, interest rates, loan terms, refinancing, budgeting, financial goals, interest costs, ARM, FAQ
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