In our previous posts we discussed how to plan for the purchase of a home. Now let us cover the two main types of mortgages. You may have heard the terms “Fixed Rate” and “Adjustable-Rate” (ARM) mortgages; and there are many facts to consider before choosing one besides the interest rate. An important, and sometimes confusing, decision; choosing the appropriate mortgage product can play a large role in determining how happy and comfortable you are in your new home.
How long you plan on remaining in your home may be the biggest deciding factor between choosing a fixed rate mortgage or an ARM. The interest rate of an ARM can change substantially over a 30-year term, so this type of mortgage may be better suited for borrowers who are likely to relocate within a few years such as first-time homebuyers or newly married couples. (Of course, you may not know for certain exactly how long you will remain in your current location, but a general idea or plan can go a long way toward making a more informed financial decision.) Some lenders offer an initial interest rate period of up to 7 years before the rate can change, so be sure to do research and know your options before committing to a lender. Because ARMs can have different financing terms, it is important to know how your lender’s program works. For instance, is the rate subject to change after 3, 5, or 7 years? At the first adjustment date, is a rate change definitely going to occur or will it depend on the market interest rates at that time?
Adjustable-Rate Mortgages offer a lower initial interest rate than fixed rate mortgages. However, an ARM may eventually have a much higher interest rate; and the fact that there are no rate surprises with a fixed mortgage makes it easier to budget for.
When shopping for your mortgage, you should be able to get comparison quotes for both adjustable and fixed rate mortgages offered by each lender. By making a few calculations and coming up with your “break-even” point, you can sleep better knowing you chose the right mortgage product for your current and future needs.