The adjustable versus fixed rate mortgage is an old debate that renews itself every year. With the low interest rates seen this year likely to continue next year, fixed rate mortgages promise safety and security.
But that doesn’t mean you should disregard the savings you could make with an adjustable rate mortgage (ARMs) or assume that fixed rates are ideal for every buyer. The crucial thing is to understand what you’re signing up for.
In this article, we’ll review the pros and cons of each type of loan with an eye to 2024 mortgage rate predictions.
Fixed Rate Mortgages in 2024
Fixed rate mortgages are traditionally higher than adjustable rate mortgages because they don’t change over the course of the loan. In other words, you tend to pay more for the peace of mind that comes with knowing your rate isn’t going to fluctuate from year to year.
Getting a great fixed rate mortgage rate on your terms in 2024 requires a good credit score. Lenders know that many homebuyers want this type of loan, and they screen applicants carefully to mitigate the risks they take on when they offer a 15-year or 30-year fixed rate.
Let’s look at the pros and cons of this type of mortgage in 2024 to help you make an informed choice.
Fixed Rate Mortgage Pros
- No uncertainties
You know exactly how much you have to pay, which means you don’t have to worry that you won’t be able to keep up with the payments if the rate goes up.
- Easy to understand
With fewer variables and less terminology than ARMs, fixed rate mortgages are simple enough to understand.
- You’re not stuck to the fixed rate
If rates go down in the future, you can try to refinance your loan at a better rate. Often, you will be able to refinance your loan after 12 months. If you take a mortgage in 2024, that would likely mean 2025-2026.
Fixed Rate Mortgage Cons
- You pay the principal more slowly
The payments in the first few years go toward the interest. If you plan to sell your home in say less than 10 years, this could be problematic.
- Can be harder to qualify for
Lenders have more flexibility with ARMs than with fixed rate mortgages, and so they can be a little more demanding in terms of your credit score. Make sure you put together a good application if you’re aiming for a fixed rate in 2024.
- Higher closing costs
While you may come across exceptions, you will almost always pay more in closing fees for this type of loan—another consequence of the extra risks the lender is taking by offering you a fixed rate.
Pro tip: If you plan to stay in the house you buy for many years to come, a fixed rate loan can be a safe choice in 2024. If rates go up, you can refinance in a year or two. All things considered, it’s good to work on improving your credit score to get the best rate possible.
Adjustable Rate Mortgages in 2024
Adjustable rate mortgages will likely continue to feature an interest rate that’s initially lower than that for a comparable fixed rate mortgage. But depending on the duration of the fixed term, as well as the length of the loan, this type of mortgage continues to raise some uncertainties. And then there are the fees to worry about.
Because the variables at play are ultimately beyond your control, rate caps can only protect you for a limited time. After that, rates may go up or down—you cannot influence that.
That being said, if you need a quick mortgage for a home that’s not going to be permanent, adjustable rate mortgages can remain an affordable alternative. To agree to one, however, you should feel comfortable enough with both the initial adjustment and the lifetime adjustment caps.
Adjustable Rate Mortgage Pros
- Lower initial payments
If you prefer low payments early in your loan, an adjustable rate mortgage can be the way to go. You could get a lower fixed rate for your adjustable mortgage for up to 10 years or more.
- Save money by selling your home
ARMs can help you save money if you plan to sell your home before the end of the mortgage. If you don’t intend to live in the house for the rest of your life, an adjustable rate could help you finance your home for the stay while paying lower interest.
- Can help you avoid refinancing
If insurance rates keep falling, an ARM can make refinancing quite unnecessary. It can help you take advantage of the lower readjusted rates without worrying about preparing the paperwork for refinancing.
Adjustable Rate Mortgage Cons
- Discounted interest rates can be misleading
Lenders continue to offer enticing discounted interest rates in the beginning, but after the first adjustment period, these rates can increase significantly.
- Prepayment penalties
Certain ARMs, most notably interest-only ones, may continue to come with costly prepayment penalties if you try to pay your mortgage early.
- Problems if the value of the home decreases
Home prices have been mostly on the rise in 2023, but if your property value decreases in the future, an ARM may leave you more exposed than a fixed-rate loan—you won’t have the backup option of selling your property.
Pro tip: If you want to get a mortgage fast and plan on moving before the end of the term, an adjustable rate mortgage can be an option in 2024. Find a broker who is willing to explain to you all the particulars of the specific ARM you want to get, including rate caps and other conditions. Only then can you decide whether this type of mortgage is safe for you.
The Verdict
When it comes to adjustable versus fixed rate mortgages in 2024, there’s no one-size-fits-all solution. You can save money with an adjustable rate mortgage in the first few years, and especially if you plan to sell your house later on. However, with interest rates likely to remain low in 2024, fixed rate mortgages will continue to be an extremely appealing choice for many homebuyers.
Ultimately, you want to find a mortgage professional who can offer you both variable and fixed rate options, and who can guide your decision based on your needs and expectations. One thing’s clear—there’s no shortage of mortgage options out there.
