Fixed- vs. adjustable-rate mortgages

December 19, 2013

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When getting a mortgage, borrowers have several different options - from FHA mortgages to jumbo loans and more. However, the primary categories of mortgages have to do with interest: Fixed and adjustable-rate loans. Choosing the right type of home loan often depends on the borrower and what they plan to do with their home. There are advantages to getting both types of mortgages, though many first-time home buyers will usually invest in a fixed-rate mortgage.

Fixed rate
A mortgage where the interest rate does not change over the life of the loan is called a fixed-rate mortgage. The rate is usually locked in at the beginning of the term and reflects the amount of paid interest that is owed. Homeowners with a fixed-rate mortgage aren't affected by mortgage market fluctuations. Though the interest stays the same, the length of the loan is typically 15, 20 or 30 years.

One advantage of a fixed-rate mortgage is that homeowners are able to know what their mortgage payment will be every month for the entirety of the loan. This can help homeowners budget their expenses and plan ahead. The loan term is also simple to understand for a lot of homeowners compared to an adjustable-rate mortgage.

However, there are some disadvantages to a fixed rate as well. When mortgage rates fall, homeowners are locked into their terms unless they refinance. A mortgage refinance can cost a few thousand dollars for homeowners and can take some time. If mortgage rates have changed dramatically, refinancing can save a homeowner a great deal over the life of the loan. If the term of loan is soon ending, it may not be worth it to refinance, as the costs may be more than the potential savings of having a lower rate.

Adjustable rate
In contrast to a fixed rate, adjustable-rate mortgages do change depending on market conditions. Borrowers generally are given a low interest rate for the first year or two on the home loan, and the rate will increase over time.

Many borrowers find ARMs attractive, as the interest rate at the beginning of the loan is generally well below a fixed rate. For homeowners who plan to stay in their house for only a short time, adjustable-rate mortgages can be less costly than fixed-rate terms. Homeowners can also take advantage of falling rates without needing to refinance. Because the interest rates are usually very low, adjustable-rate mortgages may also allow a homebuyer to purchase a more expensive home they wouldn't be able to secure with a fixed-rate loan.

However, it is possible that the interest will rise above fixed rates. Homeowners will have to change their budgets month to month when interest rates and mortgage payments change. These types of loans are also more difficult to understand for many borrowers, as lenders have more flexibility in drafting terms.

Contact the Federal Savings Bank, a veteran owned bank, to find out more about affordable mortgage options.

https://www.thefederalsavingsbank.com/Advice/Fixed-vs-adjustable-rate-mortgages