What's in this article?
Whether you’re a first-time buyer or a seasoned homeowner, you have some crucial choices when choosing a mortgage.
A lot of people believe the largest purchase you will make in your lifetime is a home. This is why it’s important to understand the terms of your loan and work with your lender to choose the best loan option for you.
Learn the pros and cons of a fixed-rate mortgage and how it differs from an adjustable-rate mortgage while evaluating your loan options.
Deciding on the best option for you will depend on several factors, including your finances and even the state of the economy.
What is an adjustable-rate mortgage?
With an adjustable-rate mortgage, depending on the conditions of your specific loan and a benchmark rate index, your payments may go up or down in response to fluctuations in interest rates.
In some circumstances, going with an ARM rather than a fixed-rate mortgage could be a wise financial move that could result in thousands of dollars in savings.
ARMs can be a better option in today’s rising-rate environment due to their lower initial rates, but they also have vital risks. The recent inventory shortage and bidding wars sometimes create a sense of uncertainty for buyers. Reports show that U.S home prices rose 20% higher in 2022 than the previous year. Combined with the Fed consistently raising rates, it’s that much more critical for you to understand how your ARM will adjust during market fluctuations.
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What is a fixed-rate mortgage?
A house loan with a fixed interest rate for the duration of the loan is referred to as a “fixed-rate mortgage”. This means that the interest rate on the mortgage remains the same throughout.
Fixed-rate mortgages are attractive options for customers who want to know how much they will pay each month. Predictability is appealing for budgeting your household budget each month.
Even if the interest rate environment changes and mortgage rates begin to rise, yours will remain locked in. The stability of interest rates makes fixed-rate mortgages the most popular type of mortgage.
Pros and cons of a fixed-rate mortgage
The primary benefit of a fixed-rate loan is that it protects the homeowner from abrupt, large potential spikes in their monthly mortgage payments in the event that interest rates rise.
Mortgages with fixed rates are simple to understand and have few differences across lenders.
The drawback of fixed-rate mortgages is that getting an affordable mortgage is harder when interest rates are high. Use Homefinity’s mortgage calculator to try out different rate scenarios and see how they affect your monthly payment.
With early repayment plans, you must pay an early repayment charge to exit a fixed deal. There is also a costly arrangement fee and a restriction on overpayments.
Pros and cons of an adjustable-rate mortgage
ARMs generally come with a lower interest rate than the fixed rate. It offers potential savings during the earlier term of the loan with a fixed rate for some time and is then adjusted according to the market.
It may also be a good idea if your life is likely to change in the next few years. For instance, if you plan to relocate or sell the house, You can enjoy an adjustable fixed-rate period before selling, and the less-predictable adjustable phase starts.
One of the cons is that with increased payments after the adjustable period begins, some borrowers may struggle to make much larger payments.
ARMs require borrowers to plan for a time when the interest rate changes and the monthly payments grow.
Generally, ARMs are more complex than fixed-rate mortgages. Make sure to get clarity on all the terms from your lender in order to enjoy the benefits of an ARM.
Who should use an adjustable-rate mortgage?
Many homeowners choose ARMSs to benefit from the lower rates during the initial period
An adjustable-rate mortgage loan is ideal for buyers who only plan to stay in their homes for a short time.
With lower-than-average interest rates for the first five, seven, or ten years, borrowers can save on their monthly payments initially and then secure a new rate once they purchase a new home.
Additionally, ARMs make the most sense for first-time homebuyers because lower rates increase purchasing power. Early in the loan term, they’ll benefit from lower rates and monthly payments, meaning they’ll be able to afford a higher-cost home.
Is an ARM a good idea in 2023?
Many homebuyers are turning to adjustable-rate loans because they start with a lower, more affordable interest rate.
Mortgage rates have steadily increased throughout 2022, and they recently exceeded 6% for the very first time since 2008. And the trend doesn’t show signs of halting soon.
Industry professionals tend to agree that high inflation will keep pushing mortgage rates up, while it would take a severe recession or an unexpected event to lower them.
An ARM would allow you to save on interest in the beginning phase of your mortgage, allowing time for the market to stabilize and rates to, hopefully, lower.
Homefinity can guide you through your options
Talk to our loan officers for expert loan advice that can help you choose the best for you and your family.
Buying a home is one of the biggest investment and wealth-building steps you can take, so don’t take any steps without researching and weighing other options thoroughly.
An experienced and knowledgeable team of mortgage professionals will help you understand the differences between fixed and adjustable-rate mortgages.
Get started with Homefinity today!
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