When it's time to apply for a home loan, you have some options about the terms of the mortgage. One of the most basic choices is a fixed or adjustable interest rate. Each of these loan types comes with further term variations including term length and more.
Matching your needs is the most important quality a loan can have. When comparing fixed-rate mortgages and adjustable-rate mortgages (ARMs), there is no universal "best" answer. Rather, each one has its own ideal circumstances.
What are the defining qualities of a fixed-rate mortgage?
A fixed-rate mortgage provides a fixed interest rate and monthly principal payment for the life of your loan (known as the term). Fixed Rates are best if you plan to stay in the home for a long period of time. If the housing market changes over the course of paying back your mortgage, your interest rate will not change. On the other hand, if rates become more favorable, you can refinance to a lower rate and change the terms.
Fixed-rate loans come in different lengths, and you can work with your First Centennial Mortgage loan officer to set up either a 15- or 30-year repayment schedule. The longer, 30-year option is ideal if you want lower monthly payments, and is especially suitable if you plan on living in your new home for the a long period of time. A 15-year fixed-rate mortgage incurs less interest over its duration because it's repaid in half the time of the 30-year version. The higher monthly payments of the 15-year help you build equity faster in the new home as you move toward full repayment.
What makes an ARM unique?
Selecting an ARM is ideal if you are interested in taking advantage of low rates right away, and especially if you're planning to move within a short time period.
ARMs are defined by change over time. These loan products start out with steady rates, which are locked in for a term that typically lasts five, seven or 10 years. After that time has elapsed, the interest rates change based on an overarching index. Monthly interest may go up or down, depending on the conditions of the market. Some ARMs have caps on how high or low interest can become – keep an eye on those when selecting a loan to make sure your choice will still be suitable after the initial five, seven or 10 years elapse.
When should you start applying for mortgage approval?
When you're searching for a new home, you should seek pre-approval for a mortgage early in the home searching process. You can start conferring with your First Centennial Mortgage loan officer right away about which type of loan suits you best. Once you have a clear picture of your options, it's time to enter the pre-approval process. With pre-approval in hand, you may find it easier to deal with potential sellers and lock down your dream home.
Do you have more questions? Contact the loan officer who shared this blog post or send us a message.