Mortgage rates are rising, making it difficult for new home buyers to afford the home repayments. Here are some tips to help you figure out which type of rate is best for your income & lifestyle.
What is a Fixed Rate Mortgage?
A fixed-rate mortgage has an interest rate that remains constant throughout the loan term. Fixed-rate loans are the most famous type of financing because they provide predictability and stability — you won’t be surprised by the principal and interest charges in your monthly mortgage payment because they will stay the same throughout the loan term. (Due to changes in these costs, your total monthly fee, which includes homeowners’ insurance and property taxes, may vary slightly.)
A 30-year loan is the most familiar type of fixed-rate mortgage, but 20-year, 15-year, and 10-year loans are also available. The significant advantage of a fixed-rate loan is that it protects the borrower from unexpected and potentially substantial enhancement in monthly mortgage payments if interest rates rise. In addition, fixed-rate mortgages are simple to understand and vary little between lenders. However, the loss of flexibility is a significant disadvantage of a fixed-rate mortgage loan. If you take out a fixed-term mortgage, you should be as certain that you will remain in your current home for the fixed-rate term. While fixed-rate mortgages are transferable, doing so can come at a high cost because you’ll have to re-apply for your mortgage.
What is an Adjustable Rate?
An adjustable-rate mortgage, or ARM, is a home loan with a variable interest rate that can change regularly. This means that the monthly payments can change. The initial interest rate is typically lower than a comparable fixed-rate mortgage. After that period expires, interest rates — and your monthly expenses — may rise or fall. Interest rates are volatile, though they have trended up and down over multi-year cycles in recent decades. Although interest rates are expected to extend this year, they remain historically low, making fixed-rate mortgages the more popular option for the time being. ARMs are generally best for borrowers who do not intend to stay in a home for an extended period or live in a high-rate environment.
An ARM typically has a lower initial interest rate than a comparable fixed-rate mortgage, resulting in lower monthly payments throughout the loan. If interest rates rise, you’ll pay more in interest over the life of the loan, but the more down initial monthly payment may be worth it. The main disadvantage of an ARM is the possibility of your interest rate rising. If interest rates have increased since you took out the loan, your payment will also rise. However, ARMs typically have a reset limit. It is common to have a 1 percentage point up move cap. In addition, the maximum interest rate that can be charged over the life of the loan is limited.
Which Type of Mortgage Rate is Best for You?
The fixed-rate mortgage is likely the best option if you are risk-averse and prefer simplicity. However, an ARM (either conventional or hybrid) may be suitable if you’re ready to take a little more risk. Of course, your circumstances and goals will also influence your decision. When evaluating mortgage loan risk, it’s critical to understand whether the interest rate savings are significant enough to explain taking on the additional risk of a hybrid or traditional ARM. The difference between locking in a 0.25 percentage point lower rate and getting a whole percentage point lower rate is far less significant.
Not everyone has the same class of comfort with risk. Evaluate which option works into your lifestyle before deciding on the type of home loan you take out with a lender.
If you are confused about choosing the best mortgage option, you can contact Leap Financial anytime. We have an expert team that will guide and help you throughout your mortgage process.