Fixed, adjustable, 15 or 30 year, five or seven year – a mortgage comes in all shapes and sizes, and there is no one-size-fits-all solution.
This can make it a bit challenging for a homebuyer, especially one without much experience. However, a plethora of mortgage options is truly a good thing. By working closely with a mortgage professional, you can narrow down your choices and decide which one works best for you.
To get started, let’s discuss two of the biggest broad categories of mortgages: fixed and adjustable-rate mortgages.
“Two most common fixed-rate term periods are 15 years and 30 years.”
What’s the difference?
On the surface, fixed-rate mortgages and adjustable-rate mortgages are pretty clear. A fixed-rate mortgage, or FRM, has an interest rate that is locked in for a set period of time. An adjustable-rate mortgage, or ARM, will change after a specific number of years.
For example, the two most common fixed-rate term periods are 15 years and 30 years. Your interest payments will be frozen at the amount you agreed upon when you close on your home – for all 15 or 30 years. On the flip side, the ARM will have a fixed term period for a shorter window, typically five or seven years (but perhaps longer). After that, the variable rate kicks in, and your interest payments will change based on the current market. Obviously, this could be a good thing for you if you bought during a high-rate time, or a less-good thing if the rate increases.
Which one to choose?
More goes in to picking a fixed-rate or an adjustable-rate mortgage than just knowing the difference, though.
It really comes down to what type of buyer you are. If you’re confident you’ll be in a home for more than five years, perhaps even decades, then you should strongly consider the FRM. If you know for certainty that you’re going to move quickly, then the ARM may be better. ARMs are also more high-risk, so if you’re risk-averse, the fixed-rate is definitely your cup of tea.
Overall, think short-term ownership for ARMs and long-term ownership for FRMs, but this isn’t a steadfast rule. Either option could work for you.
What should you do?
The real answer for which mortgage you should choose is talk to your mortgage professional first. Sure, that may not be the answer you were looking for, but it is the right one. The reason for this is that while FRMs and ARMs can be broken down in to simple terms, it’s challenging to identify your best option without talking to a professional.
That’s because he or she can:
- Assess your finances.
- Provide you with example monthly payments for multiple options.
- Walk you through the nuanced elements of mortgages.
You won’t know which one is best for you unless you see how much home you can afford with either option, and the monthly payments you’d end up with. Once you have that information, you’ll be able to better compare the two.
All in all, remember that buying a house is a team effort. Make sure you surround yourself with real estate professionals who know your area and know what you want from your dream home.