Now Let’s talk about adjustable rate mortgages or also known as an ARM. An adjustable rate mortgage has a rate that varies. The rate begins set way below the market rate on a comparable fixed loan. But as the time goes on the rate increases, if the ARM continues long enough it will surpass the going rate for fixed loans. In adjustable rate mortgages they have a period of fixed time during which the initial interest remains constant. After that fixed time the fixed rate period can be anywhere from 1 month to 10 years; although shorter adjustment periods generally carry lower initial terms. Also the loan resets means there is a new interest rate based on current market rates and this rate remains until the next reset. The biggest advantage is its considerably cheaper than a fixed rate mortgage at least for the first 3 or 7 years. Also since their low initial payments often enable the borrower to qualify for larger loans. A downside of adjustable rate mortgages is your payment will change frequently during the life of the loan, so if you take out a larger loan you could be in trouble.
This week on Mortgage Monday I will be talking about the advantages and disadvantages of fixed rate and adjustable rate mortgages. Let’s first talk about fixed rate mortgages. A fixed rate mortgage charges a set rate of interest throughout the life of the loan. Each month the principal and the interest paid will vary but the total payment will remain the same. This makes it much easier to budget as a home buyer. However the payments made during the first couple years will mostly be interest payments. Advantages of a fixed rate mortgage is that the borrower is protected from sudden and possibly large increases in their mortgage payments if the interest rates spike. Fixed Rate mortgages also vary little from lender to lender. The disadvantage is that when rates are high, qualifying for a loan can be difficult because payments aren’t as affordable.
Although the rates are fixed the total amount of interest you pay depends on the term of your loan. The most common terms with a fixed rate mortgage are 30,20 and 15 year loans. The 30 year mortgage is the more popular choice because it has the lowest payment out of the three. However in the long run a 30 year loan is going to cost more because you are paying more interest and you are paying for a longer period of time. On the flip-side if you pay a shorter term loan like a 15 year mortgage the monthly pay will end up being a lot more but it will have a lower interest rate so you’ll be paying off your home faster.
So with that being being said which option do you think will work for you? Are you leaning towards fixed rate, or maybe adjustable rate? I hope this information helps you with your home buying process and some of the decision making you will be needing to make. If you are at a point where you still have more questions with how to get started with the housing process contact one of our agents and we will be happy to help you get started.