Need a
mortgage to buy a home? Oh course you do! So you’ll want to consider carefully
which type of mortgage is right for you. That’s right, you have options! And
it’s important to choose a home loan that best suits your financial
circumstances, because it can save you major money and make sure those payments
will likely remain within your financial reach.
In this
fourth installment of our Stress-Free Guide to Getting a Mortgage, we’ll walk you
through the choices, and the pros and cons of each.
Fixed-rate mortgage
True to its
name, a fixed-rate mortgage means that the interest rate you pay remains fixed
at the same level throughout the life of your loan (typically 15 or 30 years).
The majority
of home buyers prefer fixed-rate mortgages because they offer long-term
stability, says Katie Miller, vice president of mortgage lending at Navy
Federal Credit Union. And indeed, they are ideal if you plan to stay in your
home for at least five years—and the longer you stay, the more sense a
fixed-rate mortgage makes.
But keep in
mind, this peace of mind comes with a price. Fixed-rate loans typically have
higher interest rates than the initial rates offered on adjustable-rate loans.
More on those next…
Adjustable-rate mortgage
An
adjustable-rate mortgage, or ARM, is a home loan that offers a low interest
rate for an introductory period. After that period—typically two to five
years—the rate becomes adjustable up to a certain limit, depending on market
conditions. If certain economic indexes change, your rate could jump after the
intro period ends. If indexes drop, your payments might stay the same or even
go down. Hence, opting for an ARM can be a bit of a gamble. If you think you
might outstay the introductory period, take a good look at the maximum interest
rate—it’s often considerably higher than that of a fixed-rate mortgage.
Nonetheless,
if you plan to sell the home within a short period of time, an ARM may be
preferable. As long as you’re ready to move on before the introductory period
ends, you’ll benefit from the advantage of making lower payments while you’re
living in the home. Tick tock! And because your lender will be qualifying you
on the basis of a lower monthly payment, you could afford a more expensive home
than you would with a fixed-rate mortgage.
Read more on... Which
Type of Mortgage Is Right for You? A Guide for Home Buyers
Author: Daniel Bort
