Adjustable-Rate Mortgages (ARMs) and fixed-rate mortgages are the two main types of mortgages that you will come across. There are many different variables after you choose the type of loan, but you must first decide which route to go with your mortgage. Read on to find out.
Adjustable-Rate Mortgages
Adjustable-rate mortgages are mortgages where the interest can change during the loan term. Initially, the rate for the loan will be less expensive than similar fixed-rate options. Then as time passes, the interest rate will rise. If the buyer keeps the ARM for the full length of the loan, eventually the interest rate will rise above a similar fixed-rate mortgage.
At the beginning of the mortgage, there will be a period where the interest rate will stay fixed. After that, the rate will adjust depending on what was agreed when the loan was purchased. This amount of time can vary drastically and can be anywhere from a month to 10 years. If the length of time that the interest rate stays fixed is shorter, that generally means that the interest rate will start lower, as it will more than likely rise after a shorter amount of time. Once this initial period is over, the interest is re-calculated based on the current market interest rates. This new rate will then be held until the next agreed time that it will be re-calculated, which is normally the next year.
Fixed-Rate Mortgages
A fixed-rate mortgage has a fixed interest rate that stays the same over the full course of the loan. This keeps monthly mortgage payments constant every month for the buyer, however, the ratio of interest to principal will change every month.
At the start of the mortgage, the monthly payments will mostly consist of interest and as time passes the amount of principal that is paid every month will rise. The most attractive thing about fixed-rate mortgages for buyers is the consistency of the payments and protection from fluctuations in the market.
One downside to fixed-rate mortgages is that if the interest rates are high at the time of purchase, the buyers are stuck with that high rate for the full term or may not be able to afford the mortgage at all.
A 30-year mortgage is the most popular among home-buyers, but it is important to note that the interest rate will vary depending on the length of the loan term, which can be 30, 20 or 15 years long.
Which Choice Is Right for You?
Buyers must consider a large number of factors when deciding what type of mortgage is right for them, especially as the market is ever-changing. Your finances will often grow and fall due to life events and the natural course of life, especially when there is a bear or bull market.
Homeowners can also opt for a refinance, a cash-out refinance or other options and the same two types of mortgages are available for these choices. The purpose of a refinance would be to avail of a lower rate of interest in the market at that time or to cash out on the equity that the homeowner has in their property.
No matter the loan type that you can afford or that suits you, making an informed decision can save you thousands in the long run. One thing is for certain, do not opt for an ARM just because you can afford the initial monthly payment, that is a recipe for disaster. Life is unpredictable and you need to choose an option that is affordable for you long term. Best of luck!
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