Adjustable Vs Fixed Rate: Which Mortgage is Better?
Mortgages come in many flavors. One of the many things that homeowners can decide when selecting is mortgage is whether their loan will have a fixed or adjustable rate. The interest rate on a mortgage can affect the monthly payment amount. So knowing the difference between the adjustable and fixed rate mortgage, including the pros and cons, can help a home buyer decide what kind of mortgage is right for them. Here's what you need to know.
What Is an Adjustable Rate Mortgage? Fixed Rate Mortgage?
Very simply, a fixed rate mortgage is a mortgage with an interest rate that never changes. The fixed rate mortgage payment stays the same no matter how much time it takes to repay the loan. An adjustable rate mortgage (ARM) is a mortgage with an interest rate that may go up according to an interest rate index. Some adjustable rate mortgages can also go down, but this must be specifically written into the loan.
Adjustable Rate Mortgages, Pros and Cons
Adjustable rate mortgages often entice buyers with a lower starting interest rate than fixed rate mortgages. Since the monthly mortgage payment is a part of the debt-to-income ratio that enables the homeowner qualify for the loan, this means that a buyer can often qualify for a larger loan with an adjustable rate mortgage. For a home buyer who is having a hard time qualifying for a loan, an adjustable rate mortgage may be exactly what they need to buy the house they want.
On the other hand, home buyers who are having a hard time qualifying for a loan should be very cautious about purchasing a home with an adjustable rate mortgage. The unpredictability of the adjustable rate mortgage can put buyers who have a very tight budget at risk.
To reduce risk, buyers must find out answers to questions such as:
- How soon after purchasing the home can the mortgage rate change?
- Is there limit to how high the mortgage can go?
- Can the mortgage ever go down? If so, how much?
Fixed Rate Mortgages, Pros and Cons
Fixed rate mortgages give homeowners a sense of stability and predictability. Knowing how much they'll be expected to pay for their mortgage makes budgeting easier, and can also make saving easier. Homeowners who have a fixed rate mortgage can make other financial decisions based on the knowledge that their mortgage will be the same amount for as long as the mortgage is in place.
Is One Type of Mortgage Better Than the Other?
Different homeowners have different needs. A mortgage that works for one homeowner might not work for their neighbor or friends. Either way, it's important for the home buyer to do their research before signing on with a mortgage of any kind. Becoming familiar with the terms of the loan can help the home buyer decide for sure if the mortgage they want is right for them.
Contact a Lender to Get Started
If you're a Painted Desert new home buyer who is trying to get a mortgage, talk to a qualified and reputable lender before deciding between an adjustable rate and fixed rate mortgage. If you do decide to get an adjustable rate mortgage, read through the terms of the loan before signing on the dotted line. Going into the experience with eyes open and working with a qualified professional can help you get the loan that will work best for you.