Fixed Versus Adjustable Rate: How to Choose the Best Mortgage for You
Buying
When it comes to mortgage options, there is no one perfect option for everyone. After all, your financial situation looks different from everybody else you know. It follows that you’ll need a solution that’s right for you, and not according to what most people are doing. If you’re unsure which path to take, here’s how to choose a mortgage that makes the most sense for your wallet.
How to Choose a Mortgage: Fixed Versus Adjustable Rate
For mortgages, you have options. One choice isn’t always better than the other, though. Before you dive into choosing, first you must understand the difference between basic types of loans. This knowledge will help you make the right decision.
Fixed-Rate Mortgages
A 30-year fixed rate mortgage will have a lower monthly bill because the payments are more spread out over time. In addition, your interest and principal are fixed. This means they won’t change, so your payments will be predictable.
You can also do a 10, 15, or 20-year fixed mortgages, but your payments will be a bit higher because you have less time to pay it off.
Keep in mind that your bill can still go up and down based on taxes and insurance. However, a fixed interest rate does give you peace of mind, especially if you’ve found your forever home.
Adjustable-Rate Mortgages
On the other hand, an adjustable-rate mortgage (ARM) has an interest rate that will fluctuate. The initial rate will be lower, but it’s not guaranteed for the long haul.
If this doesn’t sound as good as a fixed-rate loan, hold on. There are some benefits to choosing an ARM in certain scenarios.
For instance, if you’re not planning on staying in the home forever, you’re usually better off with a shorter ARM. Many of these types of mortgages have a fixed rate for a set number of years, after which time the adjustment period begins.
The initial fixed rate for these ARM loans is nearly always lower than their fixed-rate counterparts. Thus, if you’ll be moving before the adjustment period, anyway, you could save money on interest by choosing the ARM.
However, if you plan to stay in your home for over 10 years, an ARM might not be your best bet. The fluctuating interest rate might be too much of a gamble, because you have no idea how high it could hike in the distant future.
How to Choose a Mortgage? It’s Complicated
Your choice of mortgage will always be a bit complicated. You have to think about your financial situation as well as how long you’ll be living in the home, plus what you can afford for the down payment and other fees.
In short, go over your options carefully, and do it with a trusted financial advisor, if you can. Purchasing a home is one of the biggest decisions you’ll ever make in your life. Go slowly and carefully to make it a good investment for your future.
