Discover the pros and cons of fixed- and adjustable-rate mortgages (ARMs), as well as hybrid ARMS.

Finding the right mortgage is as important as finding the right home because it has long-term financial implications. Interest rates are the key factor in determining the overall cost of your home loan. When you understand how rates work, you can select the terms that best fit your budget and financial goals. Here are the pros and cons of each.

Fixed rate, ARM and hybrid ARM loans

When shopping for a mortgage, you have three key choices:

• fixed rate
• adjustable rate mortgage (ARM)
• hybrid ARM

With a fixed rate, the interest rate remains the same for the entire life of the loan. Typically, fixed rate loans are repaid in 10, 15, 20 or 30 years. The shorter the term, the faster you build equity and pay off the loan. The longer the term, the higher the interest rate and overall interest paid but monthly payments are lower.

Typically, the initial rate for an ARM is lower than fixed rate loans. An ARM is structured so the interest rates varies. The rate is set for an initial period and then gets reset periodically. For example, a 7/1 ARM must be paid off with a “balloon payment” or refinanced in seven years and rates are adjusted annually. The rate could go up or down, depending on market conditions and Treasury Bill rates. There is a limit specified in the mortgage contract on how high or low the rate can go.

A hybrid ARM has characteristics of both fixed- and variable-rate loans. The initial rate is fixed for 5, 7, or 10 years and then adjusted annually for the life of the loan, usually 30 years. Buyers get the benefit of initial lower rates and don’t face a balloon payment or refinancing in five, seven or 10 years.

Many people like fixed rates loans because the know their payment will always stay the same. An ARM is attractive to home buyers who want to build equity quickly or plan to move or sell their house within a few years.

Get real numbers

Use the Consumers Payment/Amortization calculator to see how fixed and variable interest rates, as well as loan term length, affect how much interest you pay monthly and overall. To see total interest costs, choose “monthly” or “yearly” where it asks, “Show Amortization Table?”

In general, the shorter the repayment period, the lower your interest rate and the lower total interest you’ll pay and the higher your monthly payment will be. Conversely, with a longer repayment period, the higher the interest rate and overall interest but your monthly payment will be lower.

To get answers to any of your mortgage questions, contact of our mortgage loan officers or call us at 800-991-2121.

Consumers helps more than 1,000 members finance land, homes and home improvement projects each year. When you need a mortgage or home equity line of credit, call us at 800-991-2221. We’re here to help you get the home of your dreams!