When it’s time to buy your home, you'll find that many different options will affect your borrowing experience. One of the primary decisions you will face is choosing between a fixed-rate or an adjustable-rate mortgage. Before you make this decision, let’s explore the differences between these types of loans.
What Is a Fixed Rate Mortgage?
When comparing fixed-rate vs. adjustable-rate mortgages, a basic understanding of fixed-rate mortgages is necessary. In most cases, borrowers prefer this type of loan due to its simplicity and firm financial terms. The fixed-rate loan relies on a steady rate of interest that will stay the same throughout the lifetime of your loan.
Even if current rates rise or fall, your loan's interest rate will remain unchanged. So every payment you make to your lender will also be the same. How that money gets dispersed between the principal and interest may change, but you'll never make higher or lower payments.
Since you'll reduce your principal with each payment, every future payment will include less interest. This helps you put more toward the principal loan amount with consecutive payments. In addition, you won't have to worry about rising rates increasing the interest you'll owe on future payments.
What Is an Adjustable Rate Mortgage?
An adjustable-rate mortgage (ARM) uses a variable interest rate that fluctuates throughout the loan's lifetime.
When you initially take out the loan, the lender will charge an interest rate lower than the current market value for fixed-rate loans. Over time, your rate of interest will change. It may eventually increase until you pay a higher rate than the current fixed rate.
There will be a period in which your rate will remain constant, and that period can range from 30 days up to a decade. This can be favorable when comparing fixed-rate vs. adjustable-rate mortgages because you'll pay far less interest at the start of your mortgage repayment schedule.
When the ARM rate resets, it's based on the current market's rates. This new rate will remain the same until the market reaches another reset or change. At that time, your mortgage payments will get adjusted for the new rate.
Fixed Rate vs. Adjustable Rate
There are several factors to consider when choosing a loan type. One of the primary concerns will be whether you can afford a larger monthly payment. If the payment you'll pay at the current rates is already stretching your budget, an ARM loan may not be the right option for you.
Another thing to consider is how you'll pay off the loan. An ARM is best when paying the entire mortgage before the initial rate rises. In that case, you'll pay far less for your loan than you would with a fixed rate.
People who see or expect frequent increases in their income might also choose this option. If you can pay off most of the loan quickly, you can compensate for the rising interest rates.
Learn More About Our Mortgage Interest Rates
Contact Accel Mortgage Group to learn more about the types of loans we offer. We'll help you determine which loan type is right for you and guide you through the mortgage qualifying process.