Skip to main content

What you Need to Know About Fixed vs. Adjustable Rates




You're about to become a first-time homeowner—this is an exciting time! As you begin working with lenders on securing pre-approval for a mortgage, you probably hear some terms when it comes to mortgage interest rates such as "fixed" and "adjustable." To help you make a smart decision, here’s what you need to know about these types of interest rates.
Interest Rate 101
An interest rate is the cost of borrowing money. When you borrow money to purchase a home, the interest rate applies to how much the home will cost you with borrowed money rather than saving a lump sum for the entire purchase price.
Fixed Interest Rate
The most straightforward type of rate is a fixed one. With a fixed interest rate, this means the rate and payments stay the same, regardless of what's happening with the economy. Some homebuyers may be drawn to fixed interest rates since they offer rate security, making for easy budgeting, though it can end up costing more money in the long run. 

In the event rates go down, homeowners with fixed-rate mortgages will need to refinance. Refinancing with a reduced rate will save you some money, but keep in mind there will be upfront closing costs and time spent getting approved for a mortgage all over again with your tax documents, bank statements, and more. 
Adjustable Interest Rate
Often referred to as an Adjustable Rate Mortgage, or "ARM," these types of loans can seem complicated to a first-time homebuyer. With an adjustable interest rate, borrowers are offered lower rates and subsequently lower monthly payments early in the mortgage loan term. ARMs let borrowers take advantage of falling interest rates without needing to refinance. When you refinance, there’s a significant time investment, and it will cost money each time you refinance. When you have an ARM, you can watch rates and your monthly payment fall without having to do anything.
An adjustable rate is a less expensive way for homebuyers who don’t plan on staying in one place for very long.
On the flip side, with an ARM, your rates and payments can also go up over the life of your mortgage loan. These rates will usually have an annual cap, so if rates rise significantly and quickly, you might not be affected right away. On certain ARMs, called negative amortization loans, borrowers could wind up owing more than they did at closing because the payments on these loans are set so low to make the loans affordable that they cover only part of the interest due. The rest ends up getting baked into the principal balance.
The low initial cost of adjustable-rate mortgages might be tempting, but they bring a degree of risk and uncertainty in the long run.
Fixed or Adjustable Interest Rate: Which Is Better?
There isn’t a straightforward answer about which type of interest rate might be better than the other. There are several unique factors to take into account such as the length of your loan, the index your lender uses, the number and timing of rate adjustments, and any assumptions about the future increase or decrease in rates.
Work with a reputable and trustworthy lender to review the pros and cons of each type of interest rate for your situation. Have questions or just looking for a little advice on where to start?
Get in touch!

Comments

Post a Comment

Popular posts from this blog

5 Driveway Designs to Drive Up Your Homes Value

1.  Pavers:  Driveways with pavers are often found in the village area's of Boston, Rhode Island and Coastal communities like Pocasset, Cataumet and Monument Beach.  Very durable and many colors to choose from. This design often reminds me of Paul Revere days with candle light, lanterns and horses. 2.  Brick:    Brick  is bold, beautiful and long lasting.  Brick has multiple uses and can be combined to match your homes exterior.  You do have the ability to change the color to give a custom look to your design. A quick stop at  Pocasset Hardware  will provide you with a color key and guide to all the paints available to make your driveway stand out from your neighbors.   3.  Sea Shells:   A crushed  seashell  driveway adds character to your coastal home.  There is a little bit of a smell at first when laying the over your driveway, however in time you will loose the smell and gain a beautiful ...
Post a Comment
Read more

Be Informed: What is Escrow?

The first time you heard the term, "escrow" you may have been thrown for a loop. While the word may have had you confused the first time, here are some essential things to know about escrow—what it is, what it's used for, and how it works. What Is Escrow? Escrow is a legal notion where money or assets are held by a third-party on behalf of two other parties in the middle of completing a transaction. An escrow company provides two parties the service to make sure everyone does what they say they're going to do. The escrow company acts as a middleman to protect the assets while the home purchasing process is happening.   Applied to real estate transactions—when buying or selling a home, escrow is the trusted third-party, who is someone other than the buyer or seller, who will hold money to make sure you execute the transaction correctly. The key thing to remember here is that the third-party is a trusted party . This is a neutral entity who does...
Post a Comment
Read more

11 Steps To Downsizing Your Home

Nothing lasts forever -- including a home where you raised a family or lived most of your working life. And it's a fact of life that suddenly, a place that was perfect for you a decade or two ago might start to feel cavernous and empty (or just contain more square footage than you really want to clean regularly). If you're starting to dream about trading in your rambling old house for a smaller cottage or new condo, then it's probably time to seriously consider downsizing from your current home. Before you start shopping and put your home on the market, though, there are a few things you need to think about and discuss with any family members who'll be making the journey with you. Consider your finances It's tempting to look up your home on a website like Zillow or Redfin and revel in how much money it's worth today. So finances might not be top-of-mind when you're thinking about downsizing -- you may believe that you're guaranteed to save money...
Post a Comment
Read more