When you’re funding your home buyout deal in installments, you have a range of options for customizing your loan setup. One key decision is how you plan to repay the housing loan and the interest—whether at a fixed rate or one that fluctuates.
Fixed-Rate Mortgage
A fixed-rate mortgage is a home loan where the interest rate remains constant throughout the entire loan term.
For example, if you secure a 30-year fixed-rate mortgage in 2025 at an interest rate of 6%, you will continue paying that same 6% interest rate until 2055, regardless of market fluctuations.
If market interest rates fall below your fixed rate, you may have the option to refinance to reduce your payments. However, refinancing comes with fees. It’s essential to weigh these costs and consider how long you plan to stay in your current home before deciding if switching to a lower rate is financially wise.
Adjustable-Rate Mortgage (ARM)
With ARMs, the interest rate is fixed only for an initial period—typically five or seven years—and then adjusts periodically based on a market index, such as the U.S. Treasury rate.
For instance, a 5/1 ARM keeps the interest rate fixed for five years, after which it adjusts annually. The adjusted rate could go up or down depending on the market benchmark. ARMs generally start with lower interest rates than fixed-rate mortgages, making them attractive for short-term borrowers.
You also have the option to convert an ARM into a fixed-rate loan, depending on your lender’s terms.
Risks of Adjustable-Rate Mortgages
While ARMs may initially offer a lower interest rate, they come with long-term risks. Financial advisor Lauren Lindsay from Houston, Texas, explains, “Fluctuations can occur in either direction. If the timing of interest rate adjustments coincides with a rate increase, borrowers may face significantly higher monthly payments.”
When an ARM Might Be a Good Option
Melissa Cohn, Regional Vice President at William Raveis Mortgage, emphasizes that an ARM can be ideal if you’re planning to sell your home or pay off the mortgage before the fixed-rate period ends.
“For instance, if you’re relocating for a job and expect to live in a new place for only three years, choosing an ARM could help reduce your monthly payments,” says Cohn.
She also notes that ARMs can be suitable for individuals just starting their careers who anticipate an income increase over time. “By deferring higher payments to future dates when your salary is expected to rise, you can save money early on and enjoy more financial flexibility later.”
Final Thoughts
Both Cohn and Lindsay stress the importance of exploring all available mortgage options. Working with an experienced advisor can help you choose the best financial path based on your goals, income, and timeline.
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