If you are shopping for a mortgage it’s important to understand that there are two main types of mortgages available to you. These are a fixed rate mortgage and an adjustable rate mortgage (ARM). Just as it sounds, a fixed rate mortgage has an interest rate that is set to stay the same over the life of the loan. In contrast an ARM has a variable interest rate that will fluctuate over the life of the loan. You may desire the predictability of a fixed rate mortgage or prefer the low costs associated with an adjustable rate mortgage. There are pros and cons to both types of mortgages and deciding between them will require some research and a conversation with your Upper Valley Mortgage Lender.
For many homebuyers the unknowns involved with buying a home are enough without adding a loan into the mix that has a variable interest rate. However there are aspects of an adjustable rate mortgage that can be very beneficial. When you have an adjustable rate mortgage there will be a period of time at the beginning of your loan where your rate is fixed. This can range from a month to several years.
For example, a mortgage called a 5/1 ARM would feature a fixed interest rate for 5 years and after that period passed the rate would fluctuate every year thereafter. It is important to note that the adjusted rate will be based on the current interest rates so it is possible the rate could decrease and it’s also possible the rate can increase. While this may seem a little nerve wracking, the homebuyers who opt for a 5/1 ARM will receive an interest rate that is lower than what is associated with a fixed rate mortgage. For some people that monthly savings is more important than the long term stability.
If you are someone who has invested in a home that you plan to upgrade and improve and sell in 3-5 years, an adjustable rate mortgage might be right for you. You can save on your monthly payments and you can sell the home before the interest rate begins to fluctuate. It is important to note that a home loan with an ARM will usually end up costing you more if you keep it for the long term than a fixed rate mortgage. These loans are best used for short term ownership situations or if you plan to refinance in the future.
A fixed rate mortgage means that you lock into the loan product with an interest rate that will stay the same over the life of your loan. This can be very reassuring for many people and the terms are more straightforward than an adjustable rate mortgage. It is important to note that although the mortgage payment will stay the same, your monthly mortgage bill could still increase. This would happen if you decide to escrow your real estate taxes and insurance. Both taxes and insurance increase over the years and if your mortgage lender is making these payments on your behalf, a practice many lenders require, the monthly payment due is going to change over the years. This increase is usually small and would happen if you had an adjustable rate mortgage as well.
Ultimately a fixed rate mortgage is more predictable than an adjustable rate mortgage. They make a lot of sense if you are planning to stay in your home for a very long time. If you choose a fixed rate mortgage and interest rates go down, the only way to lower your payment would be to refinance your loan.
If you are shopping for a loan program, it is really important to understand the options that are available to you and talk them over with your loan officer. There is a lot of complicated lingo that goes along with getting a mortgage and the team at Title Mortgage Solution, LLC is committed to helping you understand all of it. We want you to choose the best mortgage product for your circumstances and we are here to help you navigate the process. Contact us today to schedule an appointment with one of our loan officers.