If you’re raring to buy a home, chances are you’ll need a mortgage. But which kind of mortgage should you get?
Home loans aren’t one size fits all, but come in a variety of forms to suit home buyers in different circumstances. One good place to start figuring out your options is a mortgage calculator, where you can plug in various home prices and and have this sum broken down into monthly payments. Still, in addition to a home’s price, you should carefully consider the type of loan you get.
Two of the main types of mortgages home buyers consider getting are a fixed-rate mortgage and an adjustable-rate mortgage, or ARM.
So what’s the difference between these two types of home loans? In a nutshell, a fixed-rate mortgage has an interest rate that stays the same over the life of the loan. An ARM, by contrast, has an interest rate that changes over time.
Before you seek out mortgage pre-approval, let’s break down the pros and cons of each loan so you can decide which one is right for you.
Fixed-rate mortgage
According to Wells Fargo Home Mortgage Area branch manager Chris Jurilla, the majority of homeowners tend to prefer fixed-rate mortgages. And for good reason: A fixed interest rate means your mortgage payments remain steady over the life of your loan.
“Fixed-rate mortgages provide more long-term stability,” Jurilla says. “And with rates still low, borrowers prefer the security of not risking a rate increase or adjustment if the market were to turn.”
If you’re a home buyer with steady employment who wants to put down roots in a community, a fixed-rate mortgage might appeal to you. This kind of loan is also advantageous to people approaching retirement, because the fixed payments make it easier to plan their finances.
The pros of a fixed-rate mortgage:
- Predictability: The interest rate doesn’t change for the life of the loan, giving home buyers peace of mind.
- Fixed costs: You can budget more easily as the rate and payments remain constant.
- Straightforward numbers: The math involved with figuring out your loan is way easier than for an ARM.
- Stability: This predictable loan is more appealing for the risk-averse.
And the cons:
- You’re locked in: You won’t be able to take advantage of falling interest rates without refinancing.
- Your borrowing has a ceiling: You may not qualify for as much house as you would like, because those mortgage payments are typically higher.
Adjustable-rate mortgage
An ARM starts out at a fixed, predetermined interest rate, likely lower than what you would get with a comparable fixed-rate mortgage. However, the rate adjusts after a specified initial period—usually three, five, seven, or 10 years—based on market indexes. If those indexes go up, your payment will go up, too (sometimes way up).
ARM vs. Fixed-Rate Mortgage: Which Home Loan Is Better for You? appeared first on Real Estate News & Insights | realtor.com®.