Fixed rate mortgages and adjustable rate mortgages, also known as ARMs, are the two primary mortgage types. Each mortgage type has its benefits.
With a fixed rate loan, you’re going to have a constant interest rate for the life of the loan. With an adjustable rate mortgage, the rate and payment can fluctuate after a set amount of time. When deciding which mortgage type to choose, it’s important to factor in your financial situation as well as your lifestyle choices.
Some advantages of a fixed rate mortgage:
• It’s easier to budget — Since you pay the same monthly principal and interest payment for the life of the loan, you can plan your budget well into the future.
• It offers protection against rising rates — Even if interest rates increase, your principal and interest payments do not because your interest rate is locked in.
Some advantages of an adjustable rate mortgage:
• Typically, interest rates of ARMs are offered at a discount rate for a set number of years, usually either 3, 5 or 7 years.
• If you know your income will increase in the future and feel comfortable not having your interest rate set for the life of the loan, you may be able to qualify for a higher loan amount if you choose an adjustable rate mortgage.
A few questions you could ask yourself when looking at fixed rate vs. adjustable rate:
• How much mortgage payment can you afford today?
• Could you afford an adjustable rate mortgage if interest rates rise?
• How long do you plan to live in this home?
• Are interest rates rising or falling, and what do you anticipate for the future?
Ronald, a mortgage broker, explains: “For a first-time homebuyer that is settled in a particular community or maybe a city or a state and they’re going to stay there for awhile, a fixed rate mortgage would be a better choice for them.
“Adjustable rate mortgage, this one you’ll get a lower rate than the market and then it will adjust accordingly depending on the program that you choose. So it can fluctuate yearly with an adjustable rate mortgage. Adjustable rate mortgage would be more appropriate for a more seasoned homebuyer and maybe someone that relocates a lot.”
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VIDEO TRANSCRIPT:
RONALD: With a fixed rate mortgage you’re going to have a fixed rate for the life of the loan. So you’re never going to have to worry about your payment fluctuating, it’s going to stay the same for the life of the loan.
RONALD: So for a first time homebuyer that is settled in a particular community or maybe a city or a state, they’re going to stay there for awhile, a fixed rate mortgage would be a better choose for them.
RONALD: Adjustable rate mortgage, this one you’ll get a lower rate than the market and then it will adjust accordingly depending on the program that you choose. So it can fluctuate yearly. Adjustable rate mortgage would be more appropriate for a more seasoned homebuyer and maybe someone that relocates a lot.
RONALD: So let’s say you live in this side of the United States and you need to relocate to the East Coast and you’re only going to be there maybe for five years, an adjustable rate mortgage may be more appropriate for you because you’re going to have a lower payment and you’re going to have a lower rate. And then once you move you can sell your home and then keep going.