Whether or not you need a fixed-rate mortgage or an adjustable-rate mortgage (ARM) greatly depends on your financial and personal circumstances. When choosing a mortgage, you should consider a wide range of factors, such as the monthly amount of mortgage payment can you afford, what kind of interest rate you qualify for, how long you plan to own the property and whether or not interest rates may fall or rise in the near future. All of these factors can help you determine what kind of loan is right for you.
Fixed-rate mortgages and adjustable-rate mortgages differ in many ways. With a fixed-rate mortgage, the interest rate does not change throughout the life of the loan, which means if interest rates rise, the borrower is protected from sudden, and potentially significant, increases in monthly mortgage payments. Having a fixed-rate means that the borrower can rely on a set monthly payment, which makes budgeting easier for homeowners.
Most mortgage companies offer a variety of fixed-rate mortgage terms, the most common of which are 30, 20 and 15 years. Most of the payments made during the first few years go toward interest. Fixed mortgages are great when interest rates are low. However, when interest rates are high, qualifying for a loan is more difficult because monthly payments are less affordable.
Adjustable-rate mortgages (ARMs) will typically start at a lower interest rate than fixed-rate mortgages. However, the interest rate may go up or down. This initial rate may stay the same for months, one year, or a few years, but when the introductory period is over, the interest rate and monthly payment are likely to go up. The interest rate you pay will be based on a measure of interest rates called an index. Your payment goes up when this index of interest rates increases; likewise, they go down when interest rates decline. Some ARMs set a limit on how high or low your interest rate can go.
The initial low rate and low mortgage payments often enable the borrower to qualify for a larger loan. Plus, if the borrower plans to sell the home after a few years, they will have spent less on an ARM than they would have on a traditional fixed-mortgage loan.
If you would like more information about qualifying for a fixed-rate mortgage or an adjustable-rate mortgage, contact PMR today. Our loan officers can help you determine which one might be best for your particular set of circumstances.