There are so many loan products available for different financial situations. Sometimes it is hard to figure out which one is right for you. Adjustable rate mortgages and fixed rate mortgages are two common types of mortgage loans. Both have their pros and cons and your particular personal and financial situation could determine which one is right for you.
Adjustable Rate Mortgages
An adjustable rate mortgage (ARM) allows for some added flexibility that a fixed rate mortgage does not. An adjustable rate mortgage does as its name suggests and adjusts after a period of time. There is an initial fixed rate period. This timeframe is different dependent upon the type of adjustable rate mortgage you select. Some come as 5/1, 7/1 or even 10/1 and vary with each lender. The first number in the fraction portion of the loan product description is equal to its initial fixed rate period. The second number reflects the adjustments made thereafter. For example, a 5/1 adjustable rate mortgage has an initial fixed rate period of five years. During this time the interest rate does not fluctuate. After the five years has ended the mortgage interest rate is adjusted annually to what the current interest rate is at the time. This could be positive or negative. If the rate is lower than your current rate then your monthly mortgage payment would be lower. The opposite is true as well.
While initially the monthly mortgage payment could be lower than a fixed rate mortgage, chances are the payment will increase after the initial fixed rate period. Because this uncertainty can cause the borrower’s monthly budget to fluctuate, when deciding on an adjustable or fixed rate mortgage, it’s important to decide if your budget can handle a potentially higher priced mortgage such as an ARM. If not, then an adjustable rate mortgage may not be for you. If you are planning to move in a few years, the lower monthly mortgage payment could be appealing.
Some adjustable rate mortgage loans have a payment cap in place ensuring your monthly payment never increase by more than a particular percentage. However, this payment cap may not cover all of the interest that is due for the period, potentially increasing the overall total debt. This can cause the borrower to be in more debt than when they first took on the loan. Be sure to review all the terms of the mortgage with your loan officer prior to accepting the loan.
Fixed Rate Mortgages
A fixed rate mortgage allows for easier budget projections as the monthly principal and interest payments remain the same for the life of the loan. However, the borrower’s total monthly mortgage payment may fluctuate slightly due to changes in property taxes and insurance. A fixed rate mortgage is usually a good choice if the borrower is going to live in the home for a long period of time. Because this is a fixed-rate loan the interest rate does not change. If mortgage interest rates drop to a lower percentage, the only way for a borrower to take advantage of them is through a refinance. A refinance would require new paperwork, possibly closing costs, etc.
While these do not cover all aspects of these two loan types, these highlights do provide you with some basic information on both. It is best to speak with a knowledgeable, trusted lender to help you determine which mortgage loan is right for you given your specific situation. No matter which type of mortgage you decide upon, be sure to check the terms regularly to ensure that you are saving the most money possible.
If you are thinking of applying for a mortgage, talk to the lending experts at Lenox/WesLend Financial or call 844-225-3669. As heard on the radio, it’s the biggest no-brainer in the history of mankind.