Fixed Rate Mortgages and Adjustable Rate Mortgages (ARM) are two loan options for homeowners and homebuyers. While the growing marketplace offers so many varieties within these two categories of loans, the right selection of the mortgage for your needs can be little difficult. To choose the best option for your new home purchase or refinance, it is good to find out a few details about both these loan options in advance.
Fixed Rate Loans:
The fixed rate loan is a set interest rate that is fixed at the time of loan approval and stays same throughout the lifetime of the loan. Fixed rate loans are generally more stable than adjustable rate loans. Most people like the fixed rate loan because they know what to expect when it comes to budgeting. A fixed rate loan is generally 1% to 1.5% higher than the start rate on an adjustable loan.
- Irrespective of the changes that happen in the broader economy, the payments and rate for fixed-rate loans stays constant.
- The stability of these loans provides easy budgeting solution to homeowners.
- The terms and conditions are easier to understand, and they are suitable for both home buyers and refinances.
- If a homeowner wants to lower the interest rate, the fixed rate loan holder needs to refinance.
- You do not have a lower start rate.
- Most of the fixed rate loans cannot be customized.
Adjustable Rate Loans:
As the name implies, in this case, the interest rate is adjustable. The initial interest rate of the Adjustable Rate Mortgage (ARM) is generally below the fixed rate. After the initial, start rate period most ARMs adjust annual on the anniversary of the first payment. The new adjustable interest rate is set 45 days ahead of that date. However, there are ARMs that adjust as frequently as every month!
- It features lower interest rates, so people may qualify to buy larger homes than they otherwise could.
- The adjustable-rate loans allow borrowers to take advantage of falling interest rates without refinancing.
- It can help loan borrowers to invest more money with the savings they see on their monthly payment.
- These mortgages offer a lower start rate for borrowers who move often.
- The payments and interest rates may rise significantly throughout the life of the loan.
- The terms and conditions involved in the ARM are quite difficult to understand. Sometimes borrowers get trapped by shady loan companies.
Many variables play an essential role in the final decision between the ARM (adjustable rate loan) and fixed rate loan. Please feel free to give me a call with any questions and allow me the opportunity to help you find the perfect loan for your situation!