When buying a home, determining the best kind of mortgage for you can be overwhelming.
It's no secret that there are a lot of mortgage types out there, all with their own advantages and disadvantages.
Two of the most common kinds of mortgages are fixed-rate mortgages and adjustable-rate mortgages (or ARMs).
A fixed-rate mortgage is a mortgage that spans out in the long run.
It's a payment over a set amount of years: ten, twenty, thirty, etc.
This can be a fantastic option if you plan on owning your home for a long period of time and want something more secure in both rate and payment.
Unfortunately, fixed-rate mortgages can also be more expensive.
Here's a quick rundown of our list:
- The advantages of a fixed rate mortgage
- The disadvantages of a fixed rate mortgage
- The advantages of an adjustable rate mortgage
- The disadvantages of an adjustable rate mortgage
The advantages of a fixed rate mortgage:
The rates and payments remain consistent, meaning there won’t be any nasty business or surprises if inflation or mortgage rates suddenly skyrocket.
The stability and certainty makes budgeting easier for people who are looking to manage their money.
A fixed-rate mortgage is a bit more “user friendly” and easier to understand when compared to adjustable-rate mortgages
The disadvantages of a fixed rate mortgage:
If you want to take advantage of falling mortgage rates, a fixed-rate mortgage may mean you have to turn to refinancing. This sound simple enough, but can mean thousands of dollars in closing costs, more trips to the title company’s office and hours of your time spent digging up all the necessary tax forms, bank statements and other paperwork you need to get a refinancing deal done.
A fixed-rate mortgage can also be too expensive for some borrowers, especially in cases where high-rate mortgages are the norm. There’s no early-on payment or rate break advantage to fixed-rate mortgages.
You won’t find much variation with fixed-rate mortgages either. They are pretty much the same from lender to lender, and most financial institutions sell their fixed-rate mortgage options on the secondary market. Adjustable-rate mortgages, on the other hand, can be customized for individual buyers and are kept on the books of the same financial institutions.
An adjustable-rate mortgage is more flexible and friendly towards those who are uncertain of how long they plan on owning their home.
These tend to be more customizable and affordable in many cases.
However, they are also subject to changing loan and interest rates in the mortgage market, and can be less secure for those who are looking to stay on a budget.
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The advantages of an adjustable rate mortgage:
Adjustable-rate mortgages can offer lower rates and payments in the early terms of the loan. Thanks to lenders using the lower payment when qualifying borrowers, this means that potential homeowners can afford more home for their buck than they might have been able to get beforehand.
Adjustable-rate mortgages also allow borrowers to take advantage when rates fall without the need to refinance, as one would have to do with a fixed-rate mortgage. There's no need to get involved at all for adjustable-rate mortgage borrowers. They can simply enjoy watching the rates and their monthly payments lessen.
An adjustable-rate mortgage is also a fantastic way to help borrowers better save and invest their money. The money they are saving on monthly payments can be put towards higher-yielding investments, if done wisely.
It's a cheaper way for potential homeowners to buy a home that they don’t plan on living in for very long.
The disadvantages of an adjustable rate mortgage:
As with falling rates, adjustable-rate mortgages are also subject to rising rates, which can rise over the life of the loan. If rates rise sharply enough, the percentage of interest will no doubt rise with it, costing borrowers much more than they initially bargained for.
The first adjustment involved with ARMs can be quite distressing. Some annual caps don’t apply to the initial change, so someone with an annual cap of two percent and a lifetime of six percent could, in theory, see their rate shoot from six percent to twelve percent a year after closing if the economy becomes shaky and rates skyrocket.
Adjustable-rate mortgages can be difficult to understand for non-lenders, as well as having more flexibility when determining the margins, caps, adjustment indexes and other factors involved. Borrowers who don’t know what they are dealing with can get trapped into a shady or bad mortgage if they are not careful.
Borrowers have to be wary of negative amortization loans, which are instances where borrowers end up owing more money than they did at the initial closing. The payments on adjustable-rate mortgages are set low so they are affordable, but also only cover part of the interest due. The remainder gets rolled into the principal balance, so one can find themselves at the mercy of an adjustable-rate mortgage without being any the wiser if they are not careful.
Now that you know the advantages and disadvantages of either side, there are questions to consider to determine whether a fixed-rate mortgage or an adjustable-rate mortgage is better for you.
How long do you plan on staying in your home?
The less time you plan on spending, the better an adjustable-rate mortgage is.
If you plan on staking your home for a long while, a fixed-rate mortgage can be much better.
There's also the market to consider, how it might fluctuate and whether or not you would still be able to afford the payments if rates suddenly skyrocketed.
Especially with an adjustable-rate mortgage, borrowers can find themselves at the mercy of the economy and market.
They can also benefit from falling rates, should they occur.
Experts (including myself) tend to say that when fixed-rate mortgages are low, they tend to be the more stable option.
However, when it comes to mortgages, you have to thoroughly analyze your needs and situation to determine what the best mortgage is for you.
Naturally, these aren’t the only two options out there, but they are a good place to get started on your hunt for a mortgage that best suits your needs.
Of course - I would love to hear your thoughts.
Leave a message in the comments section below - or call or text me at (760) 297-4539
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