Mortgage Lingo, 101 – Should you take out a Fixed Rate or Adjustable Rate?
Unfortunately, we cannot all win the big lottery (1.4 Billion Powerball this week, that is crazy!). Most of us have to take out a Mortgage Loan in order to purchase our dream home. As a borrower, one of your first choices is whether you want a fixed-rate or an adjustable-rate mortgage loan. All loans fit into one of these two categories, or a combination “hybrid” category.
As the names states, a fixed rate loan never changes, so if you purchase a home with a 30-year fixed rate, your monthly payment will stay the same for the next 30-years. Jump into the market when the rates are low and you get to keep that low rate throughout the life of your loan.
If you take out an “Adjustable Rate Mortgage” (ARM) your loan rate will change or “adjust” from time to time, usually every year after an initial period of remaining fixed. Once that initial period is over the interest rate will adjust as housing market interest rates falls and rises.
As you might imagine, both have Pros and Cons, in a nutshell: The ARM loan starts off with a lower rate than the fixed type of loan, but it has the uncertainty of adjustments later on. With an adjustable mortgage product, the rate and monthly payments can rise over time. The primary benefit of a fixed loan is that the rate and monthly payments never change but you will pay for that stability through higher interest charges, when compared to the initial rate of an ARM. This are referred to “Hybrid” as it starts fixed but adjusts later. You may hear or see an advertisement soliciting the 5/1 ARM loan, which carries a fixed rate of interest for the first five years, after which it begins to adjust every one year, or annually.
Education is the key to making smart decisions, as a home buyer or mortgage shopper. Our goal is to share tid-bits of information that are helpful to prospective home buyers/sellers. Tune in next week for a discussion on Government loans versus Conventional Loans.
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