When you start looking at home loans, you will quickly run into two main options: a fixed-rate mortgage and an adjustable-rate mortgage (ARM). Choosing between them is one of the biggest financial decisions you will make during the home-buying process.
Both options have great benefits, but they work very differently. Understanding the mechanics of each will help you choose the right loan for your budget and your future goals.
Fixed-rate mortgages: stability and predictability.
A fixed-rate mortgage is exactly what it sounds like. The interest rate stays the same for the entire life of your loan, whether that is 15 years or 30 years.
Because your rate never changes, your monthly principal and interest payment will never change either. This predictability makes it very easy to plan your long-term household budget. If you plan to settle down and stay in your first home for decades, a fixed-rate loan gives you permanent peace of mind.
Adjustable-rate mortgages: lower initial payments.
An adjustable-rate mortgage works a little differently. It usually starts with a lower interest rate than a fixed-rate loan for a set period of time. After that initial period ends, the rate can adjust up or down based on market conditions.
At Firefighters First Credit Union, one of our most popular options for first-time buyers is the 7/1 ARM. Here is how it breaks down:
- The first 7 years: Your interest rate is locked in for the full seven years. That means your monthly principal and interest payment stays the same during that time. This introductory rate is typically lower than a standard 30-year fixed rate, which means a lower monthly payment for your first seven years.
- After 7 years: The rate can adjust once every year based on market conditions.
Because your rate can adjust later, it’s important to feel comfortable with how those changes could impact your payment over time. However, ARMs have built-in safety caps. These caps strictly limit how much your interest rate can adjust at one time and set an absolute maximum for how high your rate can go over the life of the loan.
Why an ARM makes sense for many first-time buyers.
Most first-time homebuyers do not actually stay in their very first house for 30 years. On average, many buyers move up to a larger home, relocate or refinance within five to seven years.
If you think you might outgrow your first home or move within seven years, a 7/1 ARM lets you benefit from a lower monthly payment during the time you expect to live there.
A flexible option to consider.
At Firefighters First, we understand that market conditions can change over time. That is why we offer a feature called the Rate Drop Program for our adjustable-rate mortgages.
If market interest rates drop significantly during your fixed period, this program allows you to float your rate down to match the market. This can provide added flexibility without the need for a full refinance, saving you from the extra paperwork and high closing costs.
Your next step.
The right choice depends on how long you plan to stay in the home and your personal comfort level with future market changes. You do not have to figure it out on your own.
Connect with a Firefighters First mortgage specialist today. We will look at your future plans, compare the monthly payments side by side and help you build a home-buying plan that fits your goals and your budget.
APR = Annual Percentage Rate.
ARM = Adjustable-Rate Mortgage.
First-Time Homebuyer 7/1 ARM: This is a fixed-rate loan for the first 7 years, then adjusts annually for the remaining term (30 years total). For a $400,000 loan at 5.625% Rate, 6.011% APR, estimated payment for first 84 months: $2,302.63. First adjustment capped at 7.625%, estimated payment $2,739.69. Subsequent annual adjustments limited to 2% per change, lifetime cap 5% above initial rate (maximum 10.625%, estimated maximum payment $3,429.37). Index: One-Year Treasury Constant Maturity (currently 4.35%). Taxes and insurance not included. Eligibility: First-time homebuyer per HUD definition (no home ownership in past 3 years), primary residence only, minimum 720 FICO, no delinquencies in past 2 years, 2-year employment history, 3 months reserves, debt-to-income ratio at or below 45%, loan-to-value up to 97%, down payment as low as 3%, no PMI, mandatory impound account, loan limit up to conforming high balance ($1,249,125). Rate slightly higher than standard 7/1 ARM. Not all applicants will qualify.
Representative Example: A $350,000 mortgage loan financed at 6.5% APR for 30-year fixed would result in 360 payments of $2,212.24. Taxes and insurance premiums are not included in the payment and the actual payment obligation may be greater.
