As you can tell by their names, the most obvious difference between a fixed-rate mortgage and an adjustable-rate mortgage loan involves interest rates.
With a fixed-rate mortgage, the interest rate that you lock-in at the time of the purchase of your home is the rate you’ll stick with throughout the term life. Every month until you pay off your mortgage, you’ll know exactly what your monthly payment will be. The payment would only change if you refinanced.
ARM loan interest will adjust eventually.
These mortgages offer a low teaser rate at the beginning of your loan term for a certain amount of time of your choosing—generally, 5 years, 7 years, or 10 years. When the introductory period is up, your interest rate will start adjusting to the current market interest rates for the rest of your term which is usually 30 years.
So, for a while, you’ll know exactly what your monthly mortgage payments will be. Then, your interest rate will change once a year, affecting your total monthly bill–for better or for worse.
Which is Right For You?
Normally, the teaser rate for an ARM will be a lot lower than that of a fixed-rate mortgage. Plus, the shorter the introductory period you choose for your ARM, the lower your interest rate will be. If you go with a 5-year ARM, typically you’ll end up with a rate that’s a whole percentage point lower than the rate on a 30-year fixed.
That really adds up over those 5-10 years. For example, if you’re paying $150 less a month than you would on a 30-year fixed, after 5 years you’ve saved $9,000! But what happens when that intro term is up?
Well, you might never have to find out!
Are you a first-time homebuyer and know that you’ll eventually want to scale up when you have a couple of kids? Maybe your career sends you to different locations every few years or you get bored with your surroundings easily. Either way, if you know that you won’t be staying in a home past the introductory term, an ARM might be the right choice for you.
A Covid Caveat
Because of the pandemic, rates for fixed mortgages are insanely low. Depending on the lender, you might find that the difference in interest rates between fixed and ARM isn’t overwhelming to you. Even if your plan is to move in a few years, you might elect to go with the fixed-rate mortgage regardless. That way, if you change your mind about moving, you already have that low rate locked in forever.
Fixed-Rate: 15 Year vs. 30 Year
If you’re on the hunt for a forever home, you’ll probably want to opt for a fixed-rate mortgage so you don’t have to gamble on what market rates will look like in 5-10 years.
Then, the question becomes do you opt for a 15-year or 30-year loan term?
A 15-year fixed-rate mortgage is meant to be paid off with 180 monthly payments over 15 years. With a 30-year term, you have double the amount of time, so your monthly payments will be lower.
If you can afford it, choosing a 15-year term has many benefits.
First, though your monthly payments will still be higher than they would for a 30-year term, your interest rate will be lower. A 15-year term will end up saving you tens of thousands of dollars in interest payments. Plus, you’ll be building equity in your home faster because each month you’ll be paying more towards your principal balance.
Which is Right for You?
Whether or not you’ll be able to afford the higher monthly payments will be a big deciding factor. Now, just because you have half the time to pay off a 15-year mortgage, doesn’t mean that it will be double the mortgage payment. It will still be significantly more than a 30-year, but if you do the math, you might find that you actually can comfortably swing the difference.
If you can afford it, another consideration is whether or not you have other financial goals besides paying off your home. If you’re looking to save a big chunk of change to pay for your kid’s college or want to build a robust retirement fund, then maybe the lower payments are a better option. That’s especially true if you plan on being in the house for the long haul and you don’t have plans to use your equity. Plus, 30-year terms offer some flexibility if your financial situation changes for the better. You can always pay off your loan faster or refinance to a 15-year term in the future.
No matter which of these loans you’re considering, you should reach out to a mortgage professional for guidance. They can go over all your options so you’re confident that you’re making the right decision.
Currently, mortgage rates are at historic lows, so if you’re thinking about buying a home or investment property, there’s no better time to go for it. If you want to take advantage of these rates, email us or gives us a call at (323) 412-9060.