Buying or refinancing a house can get complicated. Every homeowner has different goals, but for many of us the primary goal is to keep our monthly housing costs as low as possible. When it comes to mortgage loans, financial institutions tend to have more than a few options. So how do we know which one is right for us?
Adjustable-Rate Mortgage vs. Fixed-Rate Mortgage
Two of the most common mortgage-related terms you’ll hear are adjustable-rate mortgage (ARM) and fixed-rate mortgage. Do you know the difference?
A fixed-rate mortgage is, well, a mortgage that has a fixed rate of interest. It’s really as simple as you imagine. You keep the same rate for the life of the loan, usually 15-30 years.
Talking about adjustable-rate mortgages (ARMs) is where things can get tricky. ARMs involve interest rates that change after the agreed-upon initial term. You can usually get a lower rate for the first part of the loan, but then it often gets higher. How often does your rate change? Well that depends on the ARM.
A 5/1 ARM keeps it’s fixed rate for five years, and then changes every year until the mortgage is paid off. That means for the last 25 years of the mortgage, the rate can change dramatically. Similarly a 7/1 ARM keeps its rate for seven years, a 10/1 ARM for ten years, and so on.
Most financial institutions offer some sort of ARM, but you need to carefully check their terms. That second number could be months, instead of years. For example, a 5/6 ARM could mean the rate changes every six months after the initial 5 years.
But what about the 15/15 ARM? Is that a good option?
15/15 ARMs are becoming more common, but you won’t find them everywhere. They’re not really like other ARMs, and they’re proving to be a good option for a lot of people.
The first big difference for a 15/15 ARM is the longer initial fixed period. The first 15 does indeed mean fifteen years, which is a lot longer than the other ARMs we’ve discussed. If you can lock in a low initial rate, you have a good chance to keep that monthly payment down for a good long time.
The other big difference is that second 15, which you might assume means months, based on the other ARMs we’ve talked about here. But actually, no! The second 15 also refers to years, so the adjustment that comes after the initial period will last for the rest of the life of the loan. In other words, this means your rate would only change once!
If you’re not sure what’s so exciting about the 15/15 ARM, look back at the other types of ARMs. Every one of them involves a shorter initial fixed-rate term and a rate adjustment happening every year or so. But with the opportunity to have a low rate fixed for fifteen years and only one adjustment after that, homeowners who take out a 15/15 ARM have a much greater chance to keep those payments down.
So is the 15/15 ARM right for me?
There’s unfortunately no way to answer that here. The answer to which mortgage loan fits your situation is best answered by a mortgage loan officer. There are some guidelines we can give you to consider, however.
A 15/15 ARM might be a good idea for homebuyers who are planning to move before that sixteenth year, really want a low payment for 15 years, or who might have considered a 15-year loan but were turned off by the higher monthly payments. If you’re one of these three types of borrowers, the big appeal here is that first 15 years with a lower rate.
Many homebuyers expect to stay in their new home for at least fifteen years, but often move after ten years, on average. If you’re planning to move or refinance before that initial term is up, a 15/15 ARM might be a good idea for you. You also might consider it if you’d like to pay off your mortgage in fifteen years, but you want the flexibility of lower payments.
The downside of this mortgage option is when the adjustment happens. It’s really difficult to predict what kinds of interest rates you’ll be facing in 15 years. If the rates climb, you might get stuck with a higher rate for the back half of your mortgage.
Remember, always consult with a financial advisor before making big decisions like these. It’s important to take a good look at your financial situation and how long you expect to live in the same place beforehand. Compare loan rates and details to figure out which loan repayment strategy is best for you.