Looking to buy a home? If so, congratulations! You’re in for an exciting adventure.
As you’re shopping around for your new home, you’ll want to shop around for the right mortgage as well. In the great debate of a fixed- vs. adjustable-rate mortgage, you may be wondering which is right for you.
Well, grab a cup of coffee and settle in. We’ll break down the differences and help you decide on the mortgage type that will work best for your budget and personal preferences.
Fixed-Rate Mortgage
Are you the type of person who always likes to know exactly what to expect? Then take control of your interest rate with a fixed-rate mortgage. Once you close on a fixed-rate mortgage, your interest rate remains the same throughout the life of the loan.
Your lender determines the interest rate on a fixed-rate mortgage based on a variety of factors, including the amount you’re borrowing, your creditworthiness, and current market conditions.
Let’s talk about that last factor for a moment. When the economy is thriving, interest rates tend to be higher. You’re likely to pay more interest on what you’re borrowing because the economy is stable and strong. On the other hand, when the economic outlook is a little less certain, interest rates have the potential to drop drastically.
When interest rates are at a record low, as they were for much of 2020 and at the start of 2021, due to the pandemic, locking in those rates with a fixed-rate mortgage makes a lot of financial sense. Having a historical perspective of interest rates can help to more fully understand current market conditions. The St. Louis Fed displays average 30-year fixed rate mortgage rates from the 1970s on. This gives a good sense of how current mortgage interest rates stack up.
But there are other benefits to fixed-rate mortgages. Seize control of your budget and finances, for instance, by knowing exactly how much your monthly mortgage payment will be. Fixed-rate mortgages eliminate the guesswork from your monthly payments because those payments will remain the same throughout the life of your loan.
An amortization schedule will also provide an outline of payments, breaking down the exact amount going toward principal and interest. If you like to work in absolutes and see everything laid out in front of you, a fixed-rate mortgage may be just the option for you.
Adjustable-Rate Mortgage
On the other hand, adjustable-rate mortgages (ARMs) follow the ebb and flow of market conditions, based on an index such as the Prime Rate. Typically, adjustable-rate mortgages have a fixed rate at the beginning of the mortgage and for a specified length of time. ARMs can be advantageous in this sense because that initial fixed rate may be lower than the interest rate offered on a traditional fixed-rate mortgage.
For instance, if you know that you’re only going to live in your house for a short period of time or you expect to be able to pay off your mortgage quickly, an ARM may be the right type of mortgage for you. Likewise, if you expect interest rates to continue trending downward, you can take advantage of favorable market conditions without worrying about having to apply for a refinance.
But you may be wondering what happens if interest rates rise before your mortgage is paid in full and your initial fixed-rate period ends. Well, most ARMs come with a cap on the interest rate, so you know up front the highest interest rate you’re likely to pay. With an ARM, it’s a good idea to crunch the numbers and find out the maximum amount your monthly mortgage payment would be if the maximum interest rate should ever kick in. That way, you can be certain the maximum amount is still within your budget.
You can almost think of an ARM a little like the stock market. When you buy a stock, its value can increase or decrease over time. Though, you want the value of a stock to go up, you want the interest rate of the ARM to go down. When it does, it will save you money and lower your monthly mortgage payments. But keep in mind that interest rates for ARMs fluctuate.
If you decide down the line that you would prefer a fixed-rate mortgage, refinancing could be an option. Just be sure to factor in any prepayment penalties and the cost of the refinance before moving ahead with a new loan.
Loan Terms
Most lenders offer both fixed-rate and adjustable-rate mortgages. Likewise, you’re in the driver’s seat when it comes to your preferred loan term. You can choose a traditional 30-year loan term or a term as short as 10 years.
Each loan term comes with its benefits. For instance, the longer your loan term, the lower your monthly mortgage payment will be. On the other hand, selecting a 10-year loan term means you’ll be paying interest for a shorter period of time, saving you more money in the long run even though your monthly payments are higher. You can also opt for middle-of-the-road options with a 15- or 20-year loan term.
Looking for a home In Washington State? Solarity Credit Union provides flexibility so that you can find the ideal loan product for you.
Start imagining everything that’s possible by plugging some numbers into their home purchase calculator. It will help you decide exactly how much home you can afford. If you’re interested in a home loan refinance, you can also plug in some numbers to find out just how much money you could save.
Congratulations, once again, on taking the path toward homeownership. If you want to get one step closer to walking up the pathway of your new home, give Solarity a call. After all, they believe you should close on your home with a great lender.
