There are many different mortgage products available to today’s homebuyer. So many, in fact, that it can sometimes be confusing choosing which one is right for you. Two mortgage types are very popular but also very different – adjustable-rate mortgages (ARMs) and fixed-rate mortgages. While each has their own unique advantages and disadvantages, it is important to understand the difference between the two mortgages so that you get the loan you need and want when buying a new home.
First, the most common type of mortgage issued is a fixed-rate mortgage. A fixed-rate mortgage is simply a mortgage that has a fixed interest rate throughout the duration of the loan. The duration can vary, some people choose 10 year fixed-rate mortgages, others choose 15 year fixed-rate mortgages, and perhaps, most commonly, many homebuyers opt for 30 year fixed-rate mortgages. Often, if you have good credit and are able to afford a 10 or 15 year fixed-rate mortgage, your interest rate will be lower than a 30 year fixed-rate mortgage. But, regardless, your rate will never change which means your mortgage payment will always be more or less the same.
Adjustable-rate mortgages (ARMs) are very different from fixed-rate mortgages. Many homebuyers are intrigued by ARMs because they often carry with them a lower interest rate which can mean that your mortgage payments are somewhat (or significantly) lower than that of a fixed-rate mortgage. The way a typical ARM works is that you have a fixed-rate for a predetermined length of time (for example: 5 years) and after that fixed-rate period is over, the remainder of the loan length your interest rate will be adjustable according to the marketplace. That means that the interest rate you pay could significantly increase which means your mortgage payment will increase along with it. You either need to feel financially comfortable with whatever your mortgage payment may increase to or be prepared to sell or refinance before the fixed-rate period is over. For some individuals who work predetermined length contract jobs or just know they will only live somewhere a short length of time (less than the fixed-rate period), purchasing a home with an ARM loan may be the right choice. But, there is always risk involved because if the market changes drastically you may struggle to sell your home or be unable to refinance and then you must still be able to pay your mortgage. Consult your mortgage lender to determine which type of loan is best for your individual circumstances.