Which Type of Home Mortgage Is Right for Me?
Buying a home requires financing – there’s really no way around that unless you’re one of the nation’s financial elite. For the rest of us, it means applying for a home loan – a mortgage. However, there are multiple types of mortgage on the market, and they’re very dissimilar. Some can seem very attractive at first, but cost more in the long run. Knowing the difference is the key to making a smart decision when it comes to your home mortgage. Let’s compare fixed rate mortgages and adjustable rate mortgages (the two most common options).
Fixed Rate Mortgage
A fixed rate mortgage is what most homebuyers imagine going into the buying process. It’s similar to other types of loans – you apply for financing, the bank conducts a credit check and calculates your down payment. You’re given an interest rate and told what your monthly payments will be. You’ll make those payments for 20-30 years or so depending on the specific configuration you choose.
During that time, your interest rate will not vary, regardless of whether the national rate goes up or down. It offers predictability and stability – the chance to know what your payments will be from month to month and year to year. However, fixed rate mortgages are often offered with a higher interest rate compared to adjustable rate mortgages, and your payments can change depending on insurance and taxes.
Adjustable rate mortgages are exactly what they sound like. In contrast to a fixed rate mortgage where you pay the same monthly payment every month for the life of the loan, an ARM can change based on what the prime interest rate is doing. If the prime rate drops, your loan’s interest rate can drop too. Conversely, if the prime rate goes up, so does your monthly mortgage payment. When the prime rate is low, you can benefit greatly. Not only that, but you will find many lenders actually offer adjustable rate mortgages for a full percentage point or more lower than fixed rate mortgages. That discount can be very enticing. Is it the right choice for you?
Really, your choice of mortgage loan should depend on your financial situation and your goals in terms of homeownership. Do you plan to stay in the home for 10 or 20 years? If so, a fixed rate loan is probably the best way to go. Do you plan on moving in 5 or 10 years? If that’s the case, you might consider an ARM, says CNN Money. You might also consider an ARM if you intend to pay off the mortgage before the end of the loan.
Your choice of home mortgage needs to fit your ownership goals and your financial situation. If you need a predictable payment from month to month for the life of the loan, a fixed rate mortgage is likely a better choice. If you want to take advantage of discounted interest rates and pay the loan off early, an ARM is a reasonable choice.
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