The Future of Mortgage Rates: A Look at Fixed vs. Adjustable

You probably know the traits you look for and find attractive in a person. But what makes a mortgage attractive to a home buyer? Similar to individual romantic taste, home loan desirables vary for everyone and depend on several uncontrollable factors. 

So how is attractiveness measured? When we look for a partner, we prioritize specific characteristics that may change based on our surroundings. When we look for a mortgage, the same concept applies, but the interest rate is based on market conditions. Urban Institute accurately summarizes how lenders determine the desirability of a home loan:

“Mortgage rate attractiveness is measured by the difference between the current mortgage rate and the average 30-year mortgage rate over the preceding three years.” 


This may seem like a simple explanation, but the nuances of the housing market and the federal economy are unpredictable. Therefore, prospective borrowers need to know what to expect when applying for mortgage approval. This way, they can adequately prepare for their financial future.


Fixed-Rate Mortgages vs. Adjustable-Rate Mortgages (ARMs)

With a fixed-rate mortgage, the interest rate remains the same for the entire life of the loan. As a result, monthly payments remain unchanged, and fixed-rate loan borrowers needn’t worry about rising market rates (unless they plan on moving in the future and applying for a new loan).

This stability, however, comes at a cost. Despite an unchanging rate, the amount is almost always higher than the initial rate for an adjustable-rate mortgage, or ARM. 

An ARM operates differently because its monthly payment increases and decreases depending on the status of the housing market. This only occurs, though, after the mortgage’s initial fixed period. The fixed period of an ARM (typically lasting 5-30 years) locks in the interest rate until the time frame ends. Take this example:

For a 5/1 ARM, the fixed rate period lasts for five years (the “5” in a 5/1 ARM). In other words, for the first five years of the loan, market fluctuations won’t affect your interest rate. When this introductory period is up, your interest rate adjusts once annually according to the current housing market status (the “1” in a 5/1 ARM). This consequent time frame is known as the adjustment period, which lasts until the loan is paid off or refinanced.


Understanding Mortgage Trends

Weather forecasts are educated guesses based on scientific observations. Despite the chance of inaccuracy, predictions from field experts tell the audience how to best prepare for possible future conditions. These estimates don’t guarantee any one outcome, but they can provide less experienced individuals with some additional peace of mind when they’re feeling unsure.


Today’s Trends

According to Forbes ADVISOR, experts expect mortgage rates to fall in the second half of 2023. With quite a fluctuation in the weeks between February and April, May’s rates have remained relatively stable. After rates peaked last year, market watchers predict a slow but steady decline for the remainder of the year. For clarity, these estimates refer to 30-year fixed-rate mortgage rates, which economists typically use as a baseline. 

As the rate of inflation slowly but gradually declines, economists expect housing rates to follow suit. However, Orphe Divounguy, a senior macroeconomist at Zillow Home Loans, warns borrowers of inevitable “rate volatility” due to disputes over raising the debt ceiling.


Thinking of buying your first home? Download The Essential Guide for First-Time  Home Buyers. >>


Planning Ahead

Consider these insights when contemplating a home loan application or refinancing potential. So far in 2023, most mortgage experts would call market rates erratic, making five- or even one-year predictions difficult and unreliable.

The same experts believe the current low inventory of housing will significantly affect future rates. In one scenario, demand for mortgages falls causing lenders to offer more competitive rates. On the other hand, this same situation causes available capital to decrease, possibly resulting in rate increases.

Unforeseeable global circumstances (such as the war in Ukraine or the COVID-19 pandemic) also contribute to rate instability. Such occurrences guarantee a significant shift in consumer activity across the board.


Determining the Right Rate for You

This choice is challenging for first-time home buyers, so it’s important to understand the implications of each. Borrowers that choose an ARM will likely pay less toward their home loan overall due to possible rate drop advantages. However, these rates can also rise beyond the borrower’s ability to afford the rate and monthly payments.

On the other hand, homeowners who opt for a fixed-rate mortgage sacrifice potential affordability for interest-rate security. So how do you decide?


How to Choose: Fixed vs. ARM

Clearly, shopping for a suitable mortgage rate isn’t easy. The primary concern is how to best protect your assets in the long term. To ensure you receive a fair offer, refer to the following advice for securing a home loan:

  • Monitor interest rates and keep tabs on housing market trends
  • Keep an eye on your credit and try to boost your score
  • Explore your options by comparing various lenders’ rates


The Bottom Line: Always Borrow with Caution

No one wants to drag an umbrella around if the meteorologist only calls for slight chances of rain. But no prediction guarantees 100 percent accuracy, no matter how educated it is. Even if it doesn’t rain, at least you brought an umbrella on the off chance the sky suddenly opens up. 

First State Community Bank’s Essential Guide for First-Time Home Buyers outlines all the tips, tricks, and resources you need to secure a home loan with confidence. Don’t get stuck in the pouring rain. Prepare for a financial future that supports your dream home by downloading our free e-book. 


Download Guide: The Essential Guide for First-Time Home Owners

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