If you’re thinking about owning a home one day, you will likely have to take out a mortgage to help finance your new home. There are two different types of mortgage loans. Home loans can be either fixed rate loans or adjustable rate mortgages. Both have their share of pros and cons so you may want to examine them further to decide the best option for your situation. Your decision will affect how your payments are made for what may end up being the next thirty-years.
Fixed Rate or Adjustable Rate (ARM)?
Fixed Rate Mortgage: When you choose a fixed rate, you will have monthly mortgage payments that will remain the same every month for the entire term of your loan. Your loan can be 15 years or up to 30 years. Your interest rate will be based on the current market rate when you start your loan application and the interest rate won’t change unless you refinance.
The pros to a fixed rate mortgage include that you will have predetermined monthly payments and this can make it easier on your budget so you will know what you’re paying each month. The cons with a fixed rate mortgage include that you may have a higher monthly payment if your interest rate was higher and rates drop. That’s where an ARM might be a factor. Because you can’t change your rate as you would be able to with an ARM, then you won’t be able to take advantage of lower monthly payments.
Reasons to choose a fixed rate mortgage
If you’re comfortable in your career, you may want a fixed rate mortgage so you can have comfortable payments. This can help if you are working on your career or you have a growing family that you want to focus on. You may not want to take out this type of loan if you are going to move with your job soon or relocate to a bigger home in a few years. Another factor to keep in mind is that interest rates may fall at some point. Will you want to refinance to lock in a lower rate? If so, you may have to consider a new set of closing costs.
Adjustable Rate Mortgage (ARM)
If you decide you want to choose an adjustable rate mortgage or ARM, this is a mortgage where your monthly payments will be the same for a set period of time. Your rate may then change to a higher level or a lower level and this can be annually. Your rate will start out lower than with a fixed interest rate. An example of an ARM is a 5/1 ARM where your rate will be fixed for the first 5 years and then it can change annually thereafter. There are lenders that offer 7/1, 10/1 or other variables so you may want to seek them out to lock in your rate for a longer term.
The pros to having an ARM include your interest rate which will be lower early on and if interest rates drop, that means your payment may drop, as well. The downside or cons with an ARM include the cap that limits how high or low your rate can go. This will be over the lifetime of your loan so you may not be able to take advantage of every change in interest rates.
How to decide if an adjustable rate mortgage (ARM) is right for you
An ARM is right for you if this is your first home and you’re thinking about moving in a few years. This can save you money especially in the early fixed-rate portion of your loan. An ARM may not be right for you if you aren’t sure about the interest rate changes and you don’t want to risk uncertainty with changing interest rates over time. Keep in mind that you might not be able to sell your home right away when you shift from fixed to adjustable. That way you can ensure you can safely make the higher payments once your rate is adjusted.
For more information or help with your loan questions, please contact Priority Financial Network. Marc Shenkman has over 25 years of experience helping home owners and first-time buyers with their mortgages and refinancing options. For help with your mortgage, contact Priority Financial Network today!