When looking for a mortgage, there are numerous options available. Each mortgage is tailored to different home buyers and situations, so it’s essential that you understand your needs before selecting one.
Fixed Rate Mortgages
A common type of mortgage is a fixed-rate loan, where the interest rate remains constant throughout its term. This makes planning your cash flow easier and guarantees your payment won’t change even if interest rates rise.
This type of mortgage is ideal for people who want to lock in a low rate for an extended period or who don’t want their finances subject to market fluctuations. It’s also popular among borrowers planning on selling their homes soon and need assurance that they won’t lose equity when doing so.
Arms And Adjustable Rate Mortgages
There are two primary types of adjustable-rate mortgages: those that feature fixed interest rates for an initial period and those without. Both offer advantages to homeowners, but they could pose greater risks over time.
Fixed-rate mortgages offer higher interest rates than adjustable rate mortgages, but the payments remain fixed until the end of the term. On the other hand, ARMs have interest rates that fluctuate throughout their life based on an index linked to the economy.
Selecting the Right Mortgage
A mortgage is a major financial commitment, so it’s essential to select one that works best for you. You should take into account how long you plan to live in the home, your debt-to-income ratio (which lenders use to calculate how much you can afford), and your willingness to accept some financial risk.
When making your mortgage decision, you’ll want to consider the interest rate environment and how much you are willing to pay in interest over time. While fixed-rate mortgages tend to be costlier than ARMs, they remain an accessible choice for many homebuyers.
Arms are more risky than fixed-rate mortgages, but they’re often cheaper. An ARM’s initial rate may be lower than a comparable fixed rate loan and it could go lower again during the initial years of ownership. However, your monthly payments could become substantially higher if interest rates rise in the future.
Different ARMs exist, including hybrid ARMs which transfer some interest rate risk from the lender to the borrower. Hybrid ARMs often feature a “teaser” interest rate – an initial fixed rate period where the interest rate is significantly below what would apply in full indexation.
An ARM’s index rate may be set by either the government or a private company and linked to any number of financial indexes. Examples include the prime lending rate set by the government, yield on 10-year Treasury notes or even LIBOR, London interbank offered rate.
Some ARMs offer the option to “opt out” of the index at any time during their initial fixed-rate period, allowing you to switch to another rate if desired. Furthermore, many ARMs feature “life caps,” which limit how often interest rates can be adjusted.