It’s home buying season! The spring market is under way, and that marks the prime home buying and selling months.
In most parts of the country, better weather, longer daylight hours and the push to find a home when school is out makes this the time of year that a lot of buyers make their move on a home. If you’re one of those would-be buyers, get set now for decisions you will have to make in the coming months.
One of the most important choices you’ll make is what kind of mortgage you’re going to have, because that will affect your payments for the next few decades. There are two main mortgage types to choose between: adjustable-rate and fixed.
Adjustable-Rate Mortgage (ARM)
Adjustable-rate mortgages (ARMs) have monthly payments that can fluctuate with interest rates. For most ARMs, there will be an initial fixed-rate period followed by the adjusting-rate period.
In an ARM, the initial fixed-rate interest rates are typically lower than in fixed-rate mortgages, which is why some people opt for that option.
There are also different fixed-rate periods for the ARMs, the most popular of those being the 5/1 ARM. The “5” denotes a five year introductory rate, with the interest rate changing every year after that. However, lenders do offer other ARM options, including 3/1, 7/1 and 10/1.
-Lower rates/payments upfront
-Borrowers can take advantage of lower rates without needing to refinance
-Borrowers can save more money initially by accepting lower ARM rates
-Payments and rates can rise and change significantly throughout the course of a loan
-ARMS can be challenging for new borrowers to fully understand before accepting one
-ARMs called negative amortization loans, where the payment for that period does not cover the amount of interest due, can cost more overall than they did at closing
Fixed-rate mortgage payments remain constant, so they have security to offer a borrower. However, they do come at a price. Here are some comparisons to consider on a fixed-rate mortgage:
Consistent payments and rates, regardless of the economy
More budget control – Payments won’t change, so the monthly payment will never be a surprise
Simpler for first-time homeowners to understand when comparing mortgage options
A fixed-rate mortgage means borrowers have to refinance to take advantage of lower interest rates, which could cost thousands in closing fees
This is the more expensive option, particularly in high-rate areas
Fixed-rate mortgages are nearly the same with every lender, so they cannot be customized for the borrower like an ARM could be
Whichever mortgage you go with, arming yourself with the facts will help you make the best decision possible for your financial future. For more posts on homeownership, check out our guide on home equity loans and your financial checklist before buying a house.