You’ve decided you want to buy a home. Yay! One decision down, tons more to go.
Before you start consuming yourself with neighborhoods, schools, bedrooms and baths, and square footage, you may want to confront the biggest decision: fixed rate or adjustable rate mortgage.
Let’s crack the code on each.
Fixed rate mortgages
Just as it sounds, fixed rate means the interest rate does not change over the life of the loan. You can choose among 15, 20, 30 or even 40 years for the loan period and the longer the timeframe the smaller your monthly payments will be. On the flip side, though, a longer loan period means a higher interest rate and more time paying interest than paying down the principal.
The biggest plus for fixed rate mortgages is if the interest rate fluctuates yours does not change.
Adjustable rate mortgages
Referred to as ARMs, borrowers usually like these better because the interest rate can be much lower than a fixed rate. Time periods can be as little as one year or 3, 5, 7 or 10 years.
Here’s how it works. If you choose a 3-year ARM, you will have 3 years at a low, fixed interest rate. Then the loan would adjust annually to the new interest rate based on the agreed upon index plus margin.
If you don’t think you are going to be in your home longer than 5 to 7 years, an ARM is usually recommended.
You are the one that must be comfortable with the payments, though, which is why it is important to ask yourself how much mortgage payment you can afford today and how much you can afford if interest rates rise.
Tags: Mortgages
