Comparing A Fixed-Rate Mortgage With An Adjustable-Rated Mortgage
At first glance, knowing the difference between a fixed-rate mortgage and an adjustable-rate mortgage seems rather straightforward. Understanding the difference between the two types of loan rates will help you make the best choice for your mortgage. And your choice may not be quite as simple as you think, depending upon your financial situation.
The crux of the distinction between a fixed-rate mortgage and an adjustable-rate mortgage is how the rate changes, or does not change, as the case may be. Fixed-rate mortgages are locked into their rate and it will not adjust depending upon the market. An adjustable-rate mortgage (ARM) rate will vary depending upon market conditions. The rate can go either up or down, depending on what’s going on in the wider world.
Fixed-Rate Mortgages Primer
A fixed-rate mortgage locks you into an interest rate at the start of your mortgage. The rate does not change from there. If interest rates go up, then you are not affected by the increase unless you choose to refinance your mortgage or purchase a new home. At the same time, if rates decrease, then you would need to refinance to take advantage of the lower rate.
The reason many prefer a simple fixed-rate mortgage is that it offers a predictable monthly payment that is in no danger of going up when the rates go up. This does factor into the process, though, in that it can be a little bit more difficult to get financed with a fixed-rate mortgage.
And while the rate of the loan is fixed, what you will pay depends on the length of your mortgage term. The most common terms for a fixed-rate mortgage are the 30-year term and the 15-year term. Other term options are sometimes available, depending upon the lender and the situation, but these two are the most common.
Adjustable-Rate Mortgages (ARM) Primer
Interest rates for an adjustable-rate mortgage can, well, adjust. The rate for an ARM is a little more fluid than with a fixed-rate mortgage. Many ARMs will start out with a lower interest rate than you see with a fixed-rate mortgage. However, after an introductory rate period, your interest rate will inevitably change. And, at the end of the day, the direction is almost always upward.
The math with an ARM needs to be a little more precise. It is very important that you understand what your payment can adjust upwards to. You need to be aware of how soon your payment could increase. Knowing how frequently your interest rate can change and if there is a cap, or limit, to how high the rate can go will help you make an informed decision.
An adjustable-rate mortgage can be quite appealing at first glance. Many assume that they’ll sell their home prior to the first adjustment or plan to refinance before the rate increase hits. While this can be a worthy gamble, this can also backfire quickly if the market changes course. Other variables like the value of your property can change, and this affects the financing as well.
Regardless of your desired choice in mortgages between a fixed-rate mortgage and an adjustable rate mortgage, it makes good financial sense to work with an experienced hand. The team at Range Lending is here to guide you through the mortgage process, presenting you with all of the facts to make an informed decision. We work to make the mortgage process transparent, empowering you to make the right decision with the best information available. If you are interested in either a fixed-rate mortgage or an adjustable-rate mortgage, then reach out to us today. Working with the right Mortgage Broker can place you in the best financial position when it comes to your most important asset, your home.