Which Type of Mortgage Is Right for You? A Guide for Home Buyers

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.

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Author: Daniel Bort