In terms of interest rates, we offer two types of mortgage loans: those with fixed rates that never change and those with adjustable rates that can go up or down over time. Both types offer the home buyer benefits. Which kind is right for you? Let’s take a deeper look.
A fixed rate is predictable and reliable.
The one thing you can say about a fixed-rate mortgage is that you always know what the principal and interest portion of your monthly payment will be. Whether you have a 15-year loan or a 30-year loan, these costs are virtually the same in the first year, the fifth year, the tenth year, and on and on. The only thing that can change are any escrow amounts to cover insurance and taxes.
Fixed-rate loans are popular because they are unaffected by increases in market interest rates. With a fixed rate, your loan’s interest never varies, staying predictable and steady, month after month. If market rates drop, you can always refinance your old fixed-rate loan for a newer one at a lower rate. Both the interest rate and the principal loan about will be lower, so it’s a double win. You can also lower your monthly payment by making a special payment against the principal of the loan.
Here’s how adjustable rates work.
With an adjustable-rate mortgage (ARM), the interest rate changes annually after an initial period of three to ten years of a fixed interest rate. Usually, these loans begin with lower initial interest rates than fixed-rate loans. The most common ARMs have initial periods of three, five, seven, or 10 years. For example, with a 5/1 ARM, the interest rate remains fixed for the first five years, then adjusts to the market rate each year thereafter. If the market rates change significantly during the initial period, your monthly payment could go up or down when the initial period ends. The market drives the direction of the change. Although there is a cap on how much your interest can increase in any single adjustment, there is a risk that your monthly payment could go up significantly over the life of the loan.
Many first-time homebuyers find ARMs attractive as they offer lower initial interest rates. If you do not expect to live in your first home a long time, then you can take advantage of the lower rate before you move on to your next home. The lower initial interest rates can also help first-time buyers qualify for a larger loan.
There is a loan that’s right for you.
Lean on your me and I will help ensure you are clear and without questions when choosing the type of loan that’s best for you. I have helped hundreds of first-time homebuyers navigate these critical decisions. I know and understand the questions to ask you. I know and understand the possibilities and opportunities. Our goal is to help you make the wisest, smartest decision possible in becoming a homeowner.