The answer lies in you, and your plans for the future.
First – what’s the difference between a fixed-rate and an adjustable-rate mortgage (ARM)?
A fixed-rate mortgage comes with principal and interest payments that remain the same over the life of the loan – whether it’s 15 years, 20 years, or 30 years. 30-year mortgage loans are the most common, while shorter term loans carry a slightly lower interest rate.
An ARM starts out with a fixed rate for the first few years, then it adjusts based on market indexes. That initial rate is always significantly lower than the rate on a fixed-rate mortgage.
The interest rate on this loan adjusts after a pre-set time. It might be 3 years, and could be up to 10 ten years. Some can only adjust by a set percentage per year, and some do have a lifetime cap. Some only allow for upward adjustments, so if the market indexes go down, your rate will remain the same.
The bottom line: Read all the fine print before choosing an adjustable-rate mortgage. Make sure you understand the terms.
But back to the question – which is better?
If you crave safety and predictability, and you see this as your long-term home, then you’ll probably prefer a fixed-rate mortgage loan. With interest at all-time lows, you might feel that interest can’t go anywhere but up, so a fixed-rate mortgage is your safest bet. This is the favored choice among those who plan to live in their homes for the predictable future.
The bonus: The only thing that can change is your taxes and insurance, so as your income rises, your house payment will occupy a smaller and smaller space in your budget.
The downside of a fixed-rate mortgage is that since payments will be higher, you might not qualify to purchase as much house as you might want. Also, should rates keep falling, you’ll have to refinance in order to take advantage of it.
But what if you know you’ll want to move up to a larger home or move to another community within the next several years? You might want to choose an ARM.
If you know you’ll want to move before many years, you might be wise to choose an ARM and take full advantage of the even-lower rates you’ll enjoy in the first 3, 5, 7, or 10 years. This could be your opportunity to make increased payments and build your equity quickly, giving you more money for a down payment on your next home.
The advantages are that you might qualify for a larger/better home, and depending upon the terms of your loan, you might automatically see a rate and payment reduction if rates go down.
The disadvantage is that you’ll need to be careful to understand each of the terms of your loan, or you could get something you don’t want. For instance, there is an ARM called a negative amortization loan that could put you in a position of owing more than the house is worth. With this loan, you have extremely low payments, and you only pay a portion of the interest due each month. The rest of it is added to the principal, growing the size of your loan each month.
In addition, should we be faced with another housing crisis in which home values drop significantly, you could see a huge jump in your payment and be unable to refinance out of it.
Here at Homewood Mortgage, the Mike Clover Group, we strive to find the right loan for you and your individual circumstances. We’ll be happy to speak with you, to explain all of your options, to answer all of your questions, and to get you pre-approved for a loan before you begin shopping for that new home.
Just give us a call at 469.621.8484 or apply on line at www.mikeclover.com.
18170 Dallas Parkway
Dallas, TX 75287