Lower Mortgage Rate versus Lower Monthly Payment

Fixed Rate Mortgage vs Adjustable Rate Mortgage

Deciding between low mortgage rate and a low monthly payment

You're in the market for a mortgage and you've already talked to a few mortgage lenders. Now you can't decide between the lower mortgage rate and a higher monthly payment on the 20 year fixed rate term, or the lower monthly payment (potentially higher monthly payment down the line) with the Adjustable Rate Mortgage (ARM). Then again, there's the option for a lower monthly payment on a 30 year fixed rate term. You've checked the current mortgage rates, now what do you do?

Factoring length of stay in mortgage loans

Before making an abrupt decision, you should ask yourself one basic question. How long do I plan on living in this home? If the answer to this question is less than 10 years, you may want to consider an Adjustable Rate Mortgage (ARM) because the interest rate can potentially be significantly lower at the onset than a fixed rate mortgage. If you plan on staying in the home for 10 years or more, a fixed rate mortgage may be in your best interest because the interest rate and terms of the mortgage will remain the same throughout the life of the loan. An ARM will adjust according to market conditions after the initial fixed rate period, thus potentially propelling your monthly payment out of your financial comfort zone.

Staying 10 years or more: Fixed rate mortgage could be better

If you plan on living in the home for 10 years of more, a fixed rate mortgage is definitely in your best interest. If it is a 20 year fixed rate mortgage you want, and you have a first class arsenal (good credit, 20% down payment, full-time employment, reliable income, a dependable mortgage professional by your side, etc.) at your disposal, a fixed rate mortgage could be an ideal option. Your monthly payments would be a little higher, but you will benefit from of a lower mortgage rate, a quicker build up of equity in the home and you would pay off the home 10 years sooner than you would on a 30-year fixed rate mortgage. This is, however, a best-case scenario, or a commonly desired one, to say the least. The reality for many mortgage seekers could be quite different.

Staying short-term: ARM gives lowest rates

If you plan on living in the home for less than 10 years, or you are a first time homebuyer with retirement light years away, an ARM would give you the lower monthly payments, initially, that you are looking for. However, in exchange, there is the potential for a significantly higher mortgage rate when the loan is adjusted after the initial fixed rate period. The key is to understand what you are getting into, and to have dependable knowledge and experience on your side.

Mortgage Refinancing options

Always keeping the idea of mortgage refinancing in the back of your mind will also be of importance. For example, if you are in a 10 year ARM (the rate is fixed for the first 10 years of the loan), and the interest rates on the fixed rate mortgages have become very attractive options, if not downright desirable ones, then you might want to consider refinancing mortgage at this point.

Risk of ARM vs security of 30 year fixed rate mortgage

What if the risk of an ARM is just too heavy on your mind and the monthly payments on the 20-year fixed are just too much at this point? Then a 30 year fixed rate mortgage could be the ideal situation for you. With the 30 year fixed, you would get a lower monthly payment than offered with the 20-year fixed. The drawback would be that you would have to pay a monthly payment for an additional 10 years. In addition, if you selected the 30-year fixed over the ARM, the fixed rate may be higher than the current adjustable rate on the ARM, but it would by no means be outrageously higher.

Summary

Needless to say, before you decide on any of these mortgage loans, you will have to ask yourself some questions and get a feel for what's comfortable in your financial situation. You could turn the quandary of whether to opt for a lower mortgage rate versus a lower monthly payment to a solid judgment by understanding precisely what you want. Start playing with these mortgage calculators. To help you with these decisions, it's always best to speak with a mortgage professional.

Call a Total Mortgage expert now at 877-868-2503 to find out how we can customize a mortgage loan with some of the lowest current mortgage rates for you.

Current Mortgage Rates

View Rates

Get a Fast, Free, No Obligation
Mortgage Rate Quote