The difference between a fixed -rate mortgage and an adjustable rate mortgage (ARM) loan is fairly simple. A fixed rate means you will pay the same interest rate over the entirety of your loan (usually 15 or 30 years). With an ARM loan the interest rate may go up or down, depending on the market. The harder question to answer is: which one makes sense for your situation?
The biggest advantage to a fixed-rate loan is the lack of surprises it brings. The borrower is protected from sudden increases in monthly payments if interest rates rise and the loans themselves vary little between lenders. The downside is if you’re looking for a home when interest rates are high it can be harder to qualify for a loan and monthly payments are less affordable. You can also end up paying more for your home over the course of the loan (especially with a 30-year mortgage).
ARMs often start with a lower interest rate than fixed rate mortgages, which can make them enticing to new home buyers. This low interest rate could stay the same for months, or even years. However, this introductory rate has an end date, and your interest rate will usually go up for a period of time, affecting the amount of your monthly payments.
To determine if you’re a good fit for an adjustable rate mortgage, there are some things to consider. Part of the interest rate you pay will be tied to a nationwide measure of interest rates, called an index. When the index moves up, your interest rate gets higher. When the index goes down, your payment MAY follow suit, but that is not always the case. Oftentimes ARMs will have both a cap on the maximum amount your interest rate can rise over the life of your loan, and a limit on how low your interest rate can go. That means even though the index may hit an all-time low during your mortgage term, you won’t necessarily reap the benefits of the low rate during that time.
Here are some questions to consider when debating which type of mortgage loan is right for you.
What size mortgage payment can you afford right now?
If interest rates rise, will you still be able to afford your monthly mortgage?
How long do you intend to live in the home you’re looking to purchase?
Where are interest rates heading? Is that trend anticipated to continue?
How much personal risk are you willing to take?
Both types of mortgages should be discussed with a trusted lender before you make a decision. They can help you make an informed decision on the right home loan for your situation.
Citywide Home Loans make the loan process simple. Visit www.citywidehomeloans.com/ to see how much home you can afford and find a loan program that’s right for you.