There is not a one-size-fits-all approach to loans, and when you are thinking about taking out a mortgage on a new home, or even a second home, it is best to consider which loan will work best for you. A question that many homebuyers come across is which is better, a fixed-rate or adjustable-rate loan? However, that question doesn’t come with a simple answer, and you must consider your financial situation and plan before making that choice.
Before considering either, you must first understand the difference between the two.
“There are benefits to fixed-rate mortgages as well as adjustable-rate mortgages.”
Adjustable-rate mortgages (ARM)
The interest rate on an ARM may change over time, but this doesn’t mean that your initial months are going to provide unexpected payments. On some ARMs, the interest rate may fluctuate through the life of the loan whereas on others, the interest rate may be fixed for a period. For ARMs that are fixed for a set period of time, the interest rate will adjust over time.
The interest rate on a fixed-rate mortgage does not change over the life of the loan, which means the rate will be locked in place for its duration. This consistency makes fixed-rate mortgages easier for homeowners to budget as monthly payments will not change throughout the life of the loan.
Each loan comes with unique benefits
As stated earlier, each loan type comes with its own benefits. While an ARM starts with a generally lower rate, there is the potential for increases in the long run if interest rates rise. On the other hand, since ARMs do start off with a lower monthly payment, it is easier to plan ahead and save up some money in the event of such an increase. Additionally, an ARM would be great if you are planning on refinancing or selling your home in an expected amount of time. This will allow to you take advantage of that initial low rate and save money.
When it comes to fixed-rate mortgages, a homeowner will know what the monthly mortgage will be for its entirety. Depending on the term of the loan however, be it a 15-year or 30-year mortgage, your interest and monthly payments will differ. For example, if you choose a 30-year fixed-rate mortgage, then your monthly payments will be lower, but you will be accruing more interest over time. If you select a shorter fixed-rate mortgage term, then your payments may be higher, but you can avoid the additional years of interest payments.
When deciding which loan is right for you, you must consider factors, such as intended length of stay in this home and financial factors. Ask yourself questions, such as “How much of a mortgage payment can I afford right now?” and “Is there a trend of increasing or decreasing interest rates?” Assessing your financial standing will help you to better determine what type of loan fits your needs.
Likewise, you should discuss these factors with your lender and real estate agent, as they will help you navigate the process.