Bob Reilley
March 2024
Buying or Selling? I can save you Time and Money

5 Questions: Fixed or Adjustable

There are certainly lots of mortgage loan types out there. Hybrids are a relatively new lot but only in relative terms. A hybrid mortgage is one that has features of both a fixed rate and an adjustable one. There are mortgages with different loan terms, too. Mortgage loan types can be different based upon when the loan starts and when it ends. Mortgage loan types can also be separated into ‘conforming’ and ‘jumbo.’ Jumbo loans are those where the loan amount is larger than the current conforming loan maximum.

There are also ‘interest only’ loans although they were pretty much phased out a few years ago but have made a slight comeback but only in so-called ‘portfolio’ loans. Portfolio loans are those where the lender keeps the loan and does not intend to sell it. Conforming loans on the other hand are almost always sold. Conforming lenders must sell loans to keep liquid. Without the ability to sell a loan, the lender would eventually go out of business.

Okay, so fixed or adjustable? Although the choices have sort of morphed a bit, the general answer is to select a fixed rate loan if a long term stay is expected. For shorter term ownership, an adjustable rate mortgage, or ARM, might be the better option. ARMs of course can change throughout the life of the loan while obviously the fixed note does not. So why would someone choose a loan that can change? Historically, ARMs have lower start rates compared to a fixed rate. Even with the potential adjustments, ARMs might still be the better fit.

Take for example a parent wanting to buy a home for their new college student to live in instead of the dorms. Renting a dorm room provides zero ownership opportunities. Renting a house doesn’t either. But there is no long term commitment for a college home. Yes, the parent might decide to keep the home after their student graduates, depending upon where rates and home prices are.

Bottom line with all this is that fixed rates provide stability. No one knows what the interest rate will be 10 years from now. With ARMs there is no way to tell. ARMs can't tell you how high or low the rate can ever be but there will definitely be some fluctuations in payments over the loan haul. Fixed rates provide a better sleep at night, while ARMs can definitely save money over the short term. 

Bob Reilley CREA Real Estate Broker
E-mail: [email protected]
Cell: 630-533-0011

American Realty Network Inc.
800 Lee St
Des Plaines Il.60016

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