Should You Get an ARM or a Fixed Rate Mortgage?
At some point most home buyers must decide whether a fixed rate or adjustable rate mortgage is the right mortgage for them. Understanding the differences between these two types of mortgages can help home buyers decide what kind of loan they'd like to get. If you're a home buyer trying to decide on a mortgage, here's what you need to know about fixed rate and adjustable rate mortgages.
Difference Between an Adjustable Rate Mortgage (ARM) and a Fixed Rate Mortgage
A fixed rate mortgage is a mortgage with a rate that will never change over the life of the loan. Fixed rate mortgages typically come in 15 year and 30 year mortgages. Regardless of the anticipated length of the loan, the interest rate and payment amounts will always be the same.
An adjustable rate mortgage is a mortgage with a rate that will change over time. It's common for adjustable rate mortgages to start off with a low rate and then increase over many years. The rate on ARMs can go down or up, depending on the fluctuations of the index that the adjustable rate mortgage is based on.
Pros and Cons of an ARM
Adjustable rate mortgages are often attractive to home buyers because the rate for an ARM typically starts out much lower than a fixed rate mortgage. Lower rates help the home buyer build up equity in the house, which can be an advantage when the buyer needs to take out a home equity line of credit. Adjustable rate mortgages can also be advantageous because they go down when interest rates fall, without the homeowner having to refinance. Many home buyers agree it's nice to see the mortgage payment go down without taking any action.
That said, adjustable rate mortgages are not perfect. One of the greatest disadvantages of adjustable rate mortgages is that home buyers have no way of knowing how much they'll be paying several years into their loan. This makes it difficult to budget for future mortgage payments, and could even present a hardship for the homeowner down the road.
Pros and Cons of a Fixed Rate Mortgage
Many Marina Del Rey homeowners and home buyers seeking a fixed rate mortgage will do so because they like the certainty of knowing how much their payment will be. While the rate for a fixed rate mortgage is often higher in the beginning, over many years that fixed rate may start to seem very reasonable. A home buyer who purchases a house only to finish paying off the house in 30 years may be paying comparatively little for their home by the time the mortgage is finally paid off.
Fixed rate mortgages make it easier for the homeowner to budget, put money into savings and make purchases with confidence that they will be able to afford their mortgage.
Which One Is Right for You?
Whether or not a fixed rate mortgage or adjustable rate mortgage is right for the homeowner depends on a variety of factors. Some home buyers want to have the certainty of a fixed rate mortgage, other home buyers appreciate the possibility that their mortgage rate will decrease with time. Working with a lender is important for making sure that the loan is right for the home buyer. A good lender can assess the home buyer's needs and make a recommendation based on the home buyer's budget, finances and the rates available at the time.
Home buyers who are planning to get an adjustable rate mortgage must ensure that they educate themselves about how their particular adjustable rate mortgage will work. It's important to ask questions such as:
- How long is the rate fixed until it begins to rise?
- Is there a maximum amount that the adjustable rate mortgage can reach?
- Is there a maximum amount that the interest rate on the adjustable rate mortgage can increase at any given time?
- Is there a minimum amount that the monthly payments can reach?
Discovering the answers to these questions can help ensure that home buyers take out a mortgage with open eyes. Having the answers to these questions can also help home buyers decide whether a fixed rate or adjustable rate mortgage would be a better deal for them.
Contact a Lender In Your Area
If you're a home buyer who is trying to decide between an adjustable rate mortgage and a fixed rate mortgage, contact your lender to discuss the pros and cons of each. Your lender can help you decide which type of mortgage is right for you based on your finances and budget.