Mortgages 101: Fixed-Rate Mortgages Vs. Adjustable-Rate Mortgages
Mortgages are a critical part of any real estate deal. There are many types of mortgages available, but the two main types that buyers should understand thoroughly before deciding are fixed-rate mortgages and adjustable-rate mortgages.
Mortgages are a significant financial investment, so choosing the right mortgage is important. Fixed-rate mortgages and adjustable-rate mortgages both have their advantages, but how do you know which one is right for your situation?
1. The Basics of a Mortgage
A mortgage is a loan that allows you to buy a home. If you already own a home, you can take out a second mortgage to pay for things like home improvements or college tuition. Some mortgages come with adjustable interest rates, which means that the interest you pay may go up and down depending on the market.
To get approved for a mortgage, your lender will look at three things: your credit history, your income, and the value of your home. You need good credit and stable income to get approved, especially if you’re applying for an FHA loan.
2. Fixed-Rate Mortgages
A fixed-rate mortgage is a type of home loan in which the interest rate and monthly payments do not change for the entire term of the loan. If you sign up for a five-year fixed-rate mortgage and the interest rate goes up two years into it, you won’t end up paying any more than the original amount agreed at the start.
Fixed-rate mortgages by a licensed mortgage lender are typically more attractive to people who expect interest rates to rise or have to make large mortgage payments every month. They are also helpful for people who do not have a lot of extra cash since they are less expensive. Fixed-rate mortgages are more likely to be used by people who want security over their monthly payments rather than flexibility.
Pros of Fixed-Rate Mortgages
Amid rising interest rates, fixed-rate mortgages are becoming increasingly popular. With a fixed-rate mortgage, you choose a set interest rate and lock it in for the duration of your loan term. Fixed-rate mortgages are appealing because they allow you to have more certainty about your monthly payment and long-term financial plans.
Fixed-rate mortgages typically make the most sense if you plan to stay in your home for a relatively short period or if you don’t plan to take out equity for any reason during that time.
Fixed-rate mortgages are popular because they provide a sense of security to homeowners who know exactly how much their monthly payments will be for the long term.
Cons of Fixed-Rate Mortgages
Fixed-rate mortgages can be expensive and complicated to finance your home because they require a sizeable down payment and have a big initial interest rate. The initial interest rate can jump up after the first period, which can cause you to lose money if your house loses value.
The biggest drawback is the lack of flexibility. Since your monthly payment isn’t adjusted to account for an increase in interest rates, you may find yourself suddenly unable to afford your payments if rates increase.
Another drawback is that you have to pay your mortgage off early to save on interest. This can be a big issue if you want to retire early or don’t want to give up retirement funds for decades at a time.
3. Adjustable-Rate Mortgages
An adjustable-rate mortgage (ARM) is a loan with an interest rate that can change over time. At the beginning of the mortgage, the interest rate can remain fixed for a set amount of time, or it can change anytime during the life of the loan.
The interest rate on an adjustable-rate mortgage is determined by adding a margin to an index rate, plus a fixed number. If you have an adjustable-rate mortgage and the index rate goes up, your interest rate will also increase. If the index goes down, your interest rate will decrease.
Pros of Adjustable-Rate Mortgages
The average American lives on credit, which means they have to pay their mortgage at a specific rate. Adjustable-rate mortgages allow you to have the best of both worlds. You can have an interest rate that’s lower initially and then adjust if the market rises.
This is an excellent option for young people who are just starting out. The initial interest rate may be lower than the market rate, but it will eventually increase with the market. This allows you to get a low rate for several years but also take advantage of higher rates when your income increases in the future.
Cons of Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) come with a lower interest rate than fixed-rate mortgages, but they also have an interest rate that can change over time. These loans are great for people who think interest rates will go down, but they can cost you if rates go up.
That’s because the interest rate of an ARM is tied to a benchmark rate as the one on 10-year Treasury bonds. When that changes, so does your interest rate.
4. The Differences Between the Two
Fixed-rate mortgages and adjustable-rate mortgages are two different mortgages with widely varying interest rates. Understanding the differences between the two is key to making an informed decision when purchasing a home.
With a fixed-rate mortgage, the interest rate stays the same throughout the loan period, however long that may be. On the other hand, with an adjustable-rate mortgage, the interest rate can change at any time, depending on market conditions. The initial interest rate is fixed for an initial period, but this period is usually shorter than with a fixed-rate mortgage.
If you are considering getting mortgage loans Fort Lauderdale from a mortgage refinance company, it’s essential to know your options and which type of mortgage is right for you. Feel free to contact us if you have any questions about our services or want to learn more about our Licensed mortgage lender Ft Lauderdale.