Fixed-rate mortgage and adjustable-rate mortgages are the two primary mortgage types for homebuyers. While other loans options fall within these two categories, the first step in homebuying is determining which of the two types best suits you!
A fixed-rate mortgage is exactly as it sounds – it’s a home loan with an interest rate that remains fixed or static. In other words, the interest rate doesn’t change over the length of the mortgage. The financial certainty that a fixed-loan offers is very appealing to many buyers, especially if they are looking for a steady option that fits their monthly budget.
To take advantage of lower rates that might pop up down the road, homeowners with fixed-rate mortgages would likely take the steps to refinance their current loan. This would mean closing costs, another trip to the title company’s office, and providing similar documentation needed earlier such as tax forms, bank statements, etc.
An adjustable-rate loan or ARM means that the interest rate may go up or down during the life of the home loan. An ARM starts with a fixed component, meaning that the interest rate is fixed for a certain period. This period can be as short as months or as long as years. However, the interest rate will begin to adjust after that fixed period ends, and the rate adjusts up and down with the market.
The biggest advantage of an ARM is that it is usually cheaper than a fixed-rate mortgage, at least for a period. ARM’s, however, can have a significant downside. Monthly payments may change frequently over the life of the loan, and if buyers take on a large loan, they could be in trouble when interest rates rise.
Which loan type is for me?
Considering all your personal factors and balancing them with the current economic market will help you determine which type of loan is right for you. Here are four questions to help you choose:
- How large of a mortgage payment can you afford today?
- Could you still afford an ARM if interest rates rise?
- How long do you intend to live on the property?
- What direction are interest rates heading and do you anticipate that trend to continue?
Working with a good Loan Officer will help to match you to the right mortgage product. Contact one of our home loan experts today to learn more!