ARMs vs. Fixed-Rate Mortgages: What Home Buyers Should Know
There are many different mortgage options for Newport Beach home buyers to choose from, but two of the most common are adjustable-rate mortgages (ARMs) and fixed-rate mortgages. ARMs and fixed-rate mortgages both have different features that come with different advantages and disadvantages. So how do home buyers know which mortgage is the right choice for them? Here is what all buyers need to know about ARMs and fixed-rate mortgages so they can choose the loan that fits their needs best.
For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.
Adjustable-Rate Mortgages
Adjustable-rate mortgages get their name because their interest rate adjusts as the market does. It can both rise and fall with the market, so homeowners can potentially pay more and less than a fixed-rate mortgage. When selecting what type of mortgage they want, a buyer will see ARMs have a fraction listed next to it. This fraction represents how many times the mortgage will adjust. For example, if it says 5/1, it means the ARM will adjust once every five years. It’s most common to see 5/1 and 10/1 mortgages, but some lenders also offer 3/1 and 7/1 ARMs.
Many first-time home buyers find ARMs appealing because they typically have lower interest rates than fixed-rate mortgages. However, it’s common for these rates to start off lower, but become higher as the rate adjusts itself. When choosing an ARM, home buyers need to be aware that there’s as much of a chance for their rates to rise as there is for them to fall. Fortunately, there are caps in place for how much a rate can change at once. The three caps are the payment cap, the periodic rate cap, and the lifetime rate cap. These limits change to monthly, yearly, and over the loan’s lifespan respectively.
Fixed-Rate Mortgages
On the opposite end of ARMs, fixed-rate mortgages keep the same interest rate throughout the entire lifespan of the loan. Most fixed-rate mortgages last either 15 or 30 years, and the buyer will be able to decide which is best for them. A 15-year loan will have higher monthly payments and lower interest rates, so the buyer will be able to save money if they’re able to keep up with the payments. Meanwhile, a 30-year mortgage will have lower monthly payments but higher interest. It’s up to the buyer to decide which they’re more comfortable with.
Because mortgage rates never change, this can be both good and bad. If national interest rates rise and the fixed-rate was locked in while rates were low, that’s great for the homeowner. However, if the inverse happens, the homeowner may be left frustrated while they pay interest rates that are higher than everyone else’s. The market can sometimes be unpredictable, so it can be difficult to predict if interest rates are going to go up or down or when the best time to lock them in is. So just like with an ARM, there is some risk involved when choosing a fixed-rate mortgage.
Fixed-rate mortgages and adjustable-rate mortgages can both be good choices for home buyers, but they both come with some risk. The market has ups and downs, and they can sometimes be difficult to predict. Because of this, some home buyers may find it difficult to decide which mortgage is best for them. It can be helpful to talk with a real estate agent about the options and other factors, or even speak with a financial advisor for personalized and specific feedback.
For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.
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