One of the biggest decisions to make when buying a new property, refinancing your current situation, or taking out a home equity loan is whether you want to take on a fixed or adjustable interest rate. Both have their pros and cons, and so it really is a matter of determining which one will work out best for your own personal finances.
First, you need to understand the basic differences. A fixed interest rate loan starts out at one rate and will remain stable throughout the duration of the mortgage. There are no surprises to worry about – when you sign your name on the line, the payments you expect are the only ones you will ever have to make to your lender. This allows new home buyers and people who expect to have a tight budget to know what’s coming: not everyone is comfortable with surprises, especially when those surprises can be costly!
Conversely, the payments on an adjustable rate mortgage (classically referred to as an ARM) will vary over the course of the loan. While these guarantee stability for a certain period of time, that time varies from six months to ten years; after that time is up, your monthly payments will go up or down dependent on the current economy and the rates set by the Federal Reserve.
While many people who opt for an ARM do so with the hope and expectation that their payments will decrease over time, there are no guarantees. That is why it is important to avoid this type of lending unless you are planning to sell the financed property, or to have a plan in place for refinancing into a fixed situation before your period of stability expires. ARMs still carry some level of risk, since plans change, the housing market could make it difficult or impossible to sell in your time frame, and rates can skyrocket quickly, especially if your initial payments have been very low. However, they are also a great way to save money while anticipating the ability to pay more in the future, and they can make a home that would be out of your price range with a fixed mortgage into an affordable prospect. Just use caution.
If you are planning to stay in your new house, condo, or townhouse for the entire mortgage term or longer, you may want to think more seriously about a fixed rate loan. You can always refinance to a lower rate if one becomes available, but in the meantime, you don’t have to stress over the potential of rising rates and payments that will force you out of the property you love. And because of the current economic situation in the United States, low interest is absolutely available, especially for buyers with good credit. Lock in while you can!
Whether you are certain of the type of loan you want, or whether you would like more guidance from an experienced professional, request a free quote today and begin learning more about your options. No matter what you decide, the right home is out there, just waiting for you!