Mortgages have two main payment structures – fixed rate and adjustable rate. Before you purchase a home, it’s important to understand how each mortgage option works and what the pros and cons of each are. Let’s take a look!
The most popular type of mortgage is a conventional fixed-rate mortgage. Its popularity comes from the fact that buyer’s payments stay the same throughout the payment period, so there’s no need to worry about future increases. Other benefits are the terms are simple to understand, they don’t vary much from lender to lender and the consistent payment structure protects homeowners from market swings that can cause significant increases.
Generally, fixed-rate mortgages are good for homeowners who plan to stay in their homes for at least seven years. It’s also good for those who are on a strict budget each month and need consistency in their payments. Buyers who plan to move less than seven years after they buy or those who are more comfortable with timing market fluctuations may be more well-suited for an adjustable rate mortgage.
Adjustable-Rate Mortgage (ARM):
This type of mortgage offers an introductory period (usually around five years) when the monthly payment is kept at a fixed rate. After the five years are up, the interest rate can fluctuate for the remaining time on the term. Similar to credit card interest rates, the fluctuation is impacted by the current federal mortgage interest rates, and there is typically a cap to how much the rate can increase – which is stated in the loan terms.
Buyers have incentive to take out an adjustable-rate mortgage if rates are projected to go down by the end of the introductory period or if they plan to move at the end of their introductory period. This loan type is not as good of an option for buyers who aren’t confident in navigating more complex financial terms or for those who aren’t willing to gamble a bit with money or who don’t have the financial ability to accommodate increased payments.
If you’re in the market to buy, knowing what your payment options are and considering various types of loans can help you take advantage of market conditions and save lots of money. Be sure you consult with a lender to discuss your options so you can pick the best option to fit your budget and needs.