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Pros and Cons of 30 Year Fixed Rate Mortgage vs. 5/1 ARM


Understanding a 30 year fixed rate mortgage vs. 5/1 ARM is the key to selecting the best mortgage option for your situation.  There are advantages and drawbacks to both of these home loan options, but with a concise breakdown of the pros and cons of each, you will become more educated and better prepared to choose between the two.

The first advantage of a 30 year fixed mortgage is that it is stable and predictable.  Even if a point of time goes by that you are not obtaining the best rate possible, you can enjoy peace of mind with 30-year loans that do not change interest rates without warning.  You will enjoy a fixed, steady rate for the entire duration of the loan.  You can eliminate the risk that your rate will increase when you choose this option.  If you are planning to live in the same home for a long time, this could be the best option for you.  The major downside is that the rate you pay is usually higher than the initial interest rate of 5/1 ARM mortgage options.

The 5/1 ARM option has plenty of benefits as well.  5/1 Adjustable Rate Mortgages maintain a fixed rate for five years.  As stated above, you usually benefit from a lower interest rate with 5/1 ARM, at least in the first five years.  After that, the changes seen in your interest rates will be based on economic influences and other factors.  Therefore, predicting today what your mortgage payments will be like five years from now is very hard to do.  To prevent this from being a real problem, you can either refinance or move before 5 years is up.  Indeed, as you approach the end of the 5-year term, you may be able to see that your rate is going to increase soon.  You can avoid this by mortgage refinancing and changing to a 15-year or 30-year mortgage instead.  The 5/1 ARM option tends to be the best for people who move a lot.

Your decision to choose a 30 year fixed rate mortgage vs. 5/1 ARM is only as difficult as you make it.  If you want peace of mind with 30-year loans, select that option.  If you want a lower interest rate with 5/1 ARM because you are sure you can refinance or move before 5 years is up, select the option that allows a fixed rate for five years.  If you know you will be selling your home or refinancing prior to 5 years, then 5/1 ARM will save you the most money, but speak with a Nationwide loan officer about your situation to get more insight.

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Categories : Home Loan Tips

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