What are the benefits and drawbacks of each?
For a 5/1 ARM, the benefits are as follows: since interest rates can change over time, a 5/1 ARM is designed to have lower interest payments during the first several years after the fixed 5 year period which means you will have a lower initial interest rate; If you put money saved from that lower interest rate back directly toward the principal or total loan amount, even if the interest rate adjusts upward, you’re paying less in interest because the balance your paying the interest on is lower; It is also good for people who aren’t planning on staying in their home for long because it is a starter home. You might move before the interest rate ever changes. A 5/1 ARM can have several caps, limiting the payment amount and the interest rate increase.
For a 7/1 ARM, the benefits are similar to a 5/1 ARM.
For a 10/1 ARM, the benefits are as follows: lower initial interest rate and a longer fixed period which allows the homeowners to hold onto the mortgage longer before the rate begins increasing or decreasing.
The disadvantages for all ARMs are as follows: The interest rate might increase due to the market during that year. Because the initial rate of ARMs is lower than the prevailing market rate on fixed-rate mortgages, your long-term payment will typically be higher. Refinancing will come with fees and closing costs of 3-5% of the loan amount. ARMs are complex and come with complicated rules, fees, and payment structures that can confuse the borrower. You will also have a pressure to sell your home or refinance your mortgage before the ARM period expires which is a drawback if you don’t get the offer you expected or if you can’t get approved for a refinance.
For a 30-year fixed mortgage, the benefits are as follows: your monthly payments will be lower than the other loan options, you can repay back the mortgage at any time without prepayment penalties, your interest rate is fixed so there is no concern for it rising, and you can purchase your home with as little as a 3% down.
For a 30-year fixed mortgage, the disadvantages are as follows: you will be paying more money back than all the other loans since the low interest rate is still applying for 30 years, there is no chance of your interest rate decreasing even if the interest rate that year is lower because it is fixed with this loan, and you will not have any discipline with this loan and put any of your money towards extra principal every month since a longer time to pay a loan back results in a mindset that you have a while to pay it off.