Choosing Between Fixed and Adjustable Rate Mortgages

Fixed and adjustable rate mortgages function differently over the life of the loan. Which is the best fit will depend on several factors.

Choosing Between Fixed and Adjustable Rate Mortgages Close
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Choosing Between Fixed and Adjustable Rate Mortgages

Posted by Gary Ashton on Monday, December 10th, 2018 at 9:13am.

Are Fixed or Adjustable Rate Mortgages Better?Buying a home can be both fun and exhausting. And of all of the choices one needs to make when they are shopping for a home, locating a home mortgage loan that fits your needs can be the most confusing. Understanding the terms and the implications of each mortgage choice can help a borrower get the best deal throughout the life of their loan.

One of the biggest choices a home buyer will have to make is between a fixed rate and adjustable rate loan. While one or the other may look like a better deal at first glance, research may be necessary to determine which is the best in any specific situation. The right choice for the right mortgage can potentially save thousands of dollars over the life of the loan.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

What Is a Fixed Rate Mortgage?

A fixed rate mortgage is fairly straightforward: the interest rate that is agreed on at the beginning of the loan stays the same throughout the term of the mortgage. A portion of each monthly payment goes toward the principle, while a portion goes toward interest. And because of loan amortization, the amount of interest paid each month will decrease while the amount of principal paid will increase. However, the total amount of principal and interest paid each month will remain the same throughout the loan.

Having the same mortgage payment each month can make budgeting a lot easier, as people with fixed rate mortgages will know how much to set aside for the mortgage payment each month. However, buying during a period of high interest rates locks that buyer into a high rate throughout the life of the loan. A fixed rate loan can have a 30-year, 15-year or another term, just like other types of home loans. Which the home buyer chooses will be up to their specific circumstances and abilities to pay each month.

What Is an Adjustable Rate Mortgage?

With an adjustable rate mortgage, the interest rate can change throughout the loan. It could go up or down, all depending on interest rates when it is time for the rate to be adjusted. When that interest rate adjustment will occur depends on the terms of the loan. Some maintain a fixed rate for only a few months or a year. Others will offer a fixed rate for the first five years, at which point the rate is reassessed and adjusted.

Adjustable rate mortgages often offer lower interest rates to start with higher rates later on. People who seek out adjustable rate mortgages often take them assuming that they will sell the house before the rate increases. However, if changes in interest rates or lending rules make it harder for new buyers to get mortgages, that could prevent or delay a sale later on. The same applies to assuming that the buyer will be able to refinance the loan. While a history of making payments can lead to more favorable lending terms during refinancing, there could be external factors that could make refinancing less appealing or impossible to begin with.

Should You Ever Consider an Adjustable Rate Mortgage?

Because of the uncertainty associated with adjustable rate mortgages, many financial experts recommend choosing fixed rate instead, if at all possible. However, Murfreesboro homebuyers who understand and have accounted for the risks may find an adjustable rate mortgage a more attractive option.

For instance, during times when interest rates are high - or going higher, it might be more difficult to qualify for a fixed-rate loan. The lower rate offered by an adjustable rate mortgage can help make a purchase possible. A person who does not intend to own the home for a longer amount of time could be a good candidate for an adjustable rate mortgage. However, they may have to be confident that the housing market will allow them to sell at the price they want when the time comes.

In addition, a potential home buyer who may have increasing income over time may also find that an adjustable rate mortgage is a better fit than a fixed rate mortgage. For instance, someone who has just graduated with a professional degree in medicine or law is more likely to be able to absorb the house payments as the mortgage increases due to ARM rate adjustments. Switching from an adjustable rate to a fixed rate can help reduce monthly payments, just as extending for a 40-year mortgage can.

Determining which type of loan is the best for each situation will require calculations and predictions. Home buyers should look over what the costs are over the life of the loan and what sort of interest and payment caps are available on adjustable rate mortgages. By doing all the math at the beginning, a home buyer can be more sure that they have gotten the best loan for them and their financial future.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.


Gary Ashton

The Ashton Real Estate Group of RE/MAX Advantage

The #1 RE/MAX team in the World!

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