Getting Started With Mortgages: Fixed-Rate Vs Adjustable-Rate
Posted on: 26 April 2016
If you are thinking of getting a home, then you probably have a lot on your plate. In addition to actually finding a home, you will need to thinking about the prospect of a mortgage. Unfortunately, there are quite a few different kinds of mortgages, which means that you will need to compare each option carefully. To help you get started, here is an introduction to the two most basic types of mortgages: fixed-rate and adjustable-rate.
Fixed-Rate Mortgages
The first and simplest type is the FRM, which is the most reliable and easiest to plan. With a FRM, you are getting a single interest rate that you will keep for the entirety of the mortgage. Every payment will also be the exact same size, so your first payment will be the same size as your second, third, and very last payments. This means that you can plan out a budget with a high degree of reliability and you won't be hit with an unexpected spike at any point.
If you think that an FRM might be the right choice for you, then you should ask the lender for a schedule of the proposed mortgage. Not only can this help you get a better idea of how much you will need to pay every month (since all of the math has already been done for you), but it can also help you get a much better idea of how long the mortgage will last and whether a shorter or longer option would be more preferable. While mortgages may seem pretty confusing when presented in speech, a calendar and table of figures can help make the idea seem much simpler.
Adjustable-Rate Mortgages
To contrast, ARMs do not have a strict upfront interest rate that will last for the entirety of the mortgage. Instead, you will be offered an initial rate which may go up or down in the future. These fluctuations depend on the performance of certain indexes, but the general idea is that the lender cannot directly force your interest rate to go up, which is a common misconception about ARMs.
While FRMs offer a higher degree of reliability, ARMs could end up costing you less in the long run. The initial interest rate is often lower than FRMs in order to entice new homeowners, which means that it's going to be cheaper than an FRM if the price doesn't rise too much. That being said, it is still somewhat of a gamble, so you need to make sure that you are prepared for the possibility of an unfavorable spike in payments if you are going to get an ARM.
Contact professionals like Coldwell Banker Preferred - The Kathy Gagnon Team to learn more.
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