One of the first choices a home-buyer will need to make is whether you want a fixed-rate or an adjustable-rate mortgage loan. The bulk of loans will fit into one of these two categories.
With a fixed-rate mortgage, you get a rate of interest that does not change for the entirety of the loan’s lifetime. Though the amount of interest and principal paid on a monthly basis varies, the total payment remains the same; as a result, budgeting becomes so easy for homeowners.
The main benefit of a fixed-rate loan is the fact that the borrower is safe from sudden and potentially high increases in monthly mortgage payments. The disadvantage is that when there is a high interest rate, it is more difficult qualifying for a loan because of the less affordable payments involved.
The total amount that you will pay is dependent on the mortgage term, although the rate of interest is fixed. With traditional lending institutions, you will get fixed-rate mortgage in a variety of terms, and the common ones being 30, 20 and 15 years.
An adjustable-rate mortgage, (ARM): The interest rate of the mortgage adjusts periodically based on market conditions. For example, your payment will go up if rates go up and go down if rates go down. Fixed-rate Mortgage: Unlike an adjustable-rate mortgage the interest rate is set at the time you take out the loan and will not change. Fixed-rate home loans can be 10 years, 15 years, 20 years or 30 years fixed. 30-year fixed is the most common because it allows your mortgage payment to be the lowest. Hybrid ARM: Features an initial fixed interest rate for a certain amount of time and then becomes an adjustable-rate for the remainder of the term. Standard terms are 3, 5, 7, or 10 yrs.
Which Loan Should I go for?
What you should know is that personal finances go through periods of highs and lows, so also does interest rates – even the strength of the economy goes stronger and than weakens. Putting your loan selection in context of these factors, the following questions should be paramount on your mind:
- How much mortgage payment can I afford?
- If interest rates increase, would I still be able to afford the monthly payment?
- For how long do I intend living on the property?
- Do I know the direction that interest rates are headed, and do I think that the trend will continue?
If low payments in the near term are basically what you need or you don’t intend to live in the property for a long period of time, than ARMs would be an excellent choice. And if interest rates are pretty high and expected to rise, ARMs will help you to enjoy lower rates without you refinancing. A fixed-rate would be a preferable option if interest rates are climbing or you value a steady, predictable payment.
Call us today at 425-272-2723 and we can help you with the right program for you.