Buying a house is an expensive decision, which is why many people rely on mortgages. A mortgage is a loan taken out to buy a property. However, the downside of a mortgage is that the mortgage lender will charge interest for the loan, which usually lasts up to 30 years.
If you are planning to buy a house soon, you should learn that there are different mortgages that you may consider. This article will help you understand the primary mortgage types: fixed-rate mortgage (FRM) and adjustable-rate mortgage (ARM). Read on to know the difference between the two and which is best for you:
Fixed-Rate Mortgage
From the term itself, fixed-rate mortgages charge a fixed interest rate throughout the term. The commonly offered term for this financial option is 15, 20, or 30 years. So, for example, if your mortgage term is 30 years, the rate you will pay for the first time will be the same until your last year in the agreement.
Just to clarify, the monthly rate distribution may vary every time, but the total payment will remain the same. This system works well if you’re on a budget because you know the bill that you are expecting.
Advantages
It now has lower rates
Mortgage companies in Centennial, Colorado, even in other states are charging a lower rate these days. It is mainly because of the country’s struggling economy brought by the pandemic. While ARM is also charging low interest rates, fixed-rate is still lower compared to the former.
Its rate is stable
Even if the mortgage rate increases soon, your payment will remain the same. And because ARM depends on the economy, there is a chance that your rate will spike if you chose the said mortgage type. In this case, you have nothing to worry about selecting a fixed-rate mortgage.
It offers predictable payments
If you are living from paycheck to paycheck, fixed-rate is a big help in managing your budget. With this mortgage, you don’t have to be anxious about the affordability of your next bill.
Disadvantages
Costly long-term payments
While you enjoy the low monthly rate of a fixed-rate mortgage, it may be more expensive overall, considering that you will receive the same rates over an extended payment term.
Adjustable-rate Mortgage (ARM)
Adjustable-rate mortgages also charge a constant interest rate, but only for a fixed time. After the set duration, the rate will change periodically. The given rate may also fluctuate over time since ARM reflects the current market rate. For example, on a 5-1 ARM, your rate will be stable for the first five years and fluctuate once every year.
Advantages
The interest rate is at its lowest
Since ARM depends on the current market, interests are historically low right now brought by the struggling economy.
The overall rate is cheaper
An ARM usually has a lower term compared to a fixed-rate mortgage. However, if you are paying a fixed rate for 30 years, it will still be more expensive than higher rates in the shorter term. And since ARM reflects the market’s situation, you may be able to pay for a lower interest rate moving forward.
Disadvantages
Unpredictable interest rates
You should still consider your budget when applying for an adjustable-rate mortgage. The main disadvantage is that you might pay for an unpredictably higher interest rate which you are not financially prepared for.
Conclusion
There is no right or wrong choice when it comes to deciding which mortgage you should commit to. However, you should know that the option will differ for every person, depending on various factors. If you consider fixed-rate, you should ask yourself if you are planning to stay in the loaned house for 15 years or more. If you are leaning towards ARM, you should see if you can still afford to pay it even if the rate increases.
If you want to learn more about fixed and adjustable-rate mortgages, then you are in the right place. As one of the best mortgage lenders in Centennial, CO, our experts at Liberty Mortgage Group will be able to guide you through this process to help you make informed decisions. Get in touch with us today to see how we can help!
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