Finding the perfect home can make any first-time buyer breathe a sigh of relief. Now that you’ve spotted your dream home and set aside money for a down payment you’ll have to start figuring out if a fixed-rate mortgage or adjustable rate mortgage is right for you.
An adjustable rate mortgage (ARM) is just as it sounds, the interest rates adjust to the market. A fixed mortgage rate means the interest rate remains the same for the duration of the loan, be it 15 or 30 years. Now that you have the basics down, there are some advantages and disadvantages to each one.
Adjustable Rate Mortgages
If rates in the market grow, so will yours; if the market rates fall, you will benefit from the lower rates. An ARM is periodically reset after a fixed period of time; after that time your rate could be reset every year, every two years, or every few months. You might hear the term a 3/1 ARM, this means your rate is adjusted every year after the initial three years of the mortgage. ARMS also have an annual and lifetime cap on the interest rate changes. This means the rate cannot change more than ”x’ percentage every year, and “x” percentage throughout the lifetime of the loan.
What attracts some first-time buyers to ARMs is the ability to have lower payments within the first few years, in the mean time the home buyer might make much needed repairs or save money.
A big disadvantage of an ARM is that the interest rate could increase too much and you could be paying much more than you anticipated. An initial $1,000 monthly payment could change to $1,500 in a few years, a responsible owner has to be prepared for these changes. If you choose an ARM it is a wise choice to set aside additional funds every month that you might need several years down the road.
Fixed-rate mortgages are easier to understand and provide stability for new homeowners who do not want to rely on how well the market is doing. However, in order to take advantage of changes in the market, a new homeowner with a fixed rate would have to refinance their mortgage which means paying for the closing costs and time spent getting the refinance completed.
Borrowers who plan on having a fixed rate will also find that the rates are the same across the board, so getting a rate customized for your needs is not likely to happen.
While deciding on the type of mortgage will work for you keep in mind how long you plan on staying in the home, whether or not you expect your income in the future to rise, and if you could afford your payments if interest rates rise.
Buying a home is a big investment, ask questions and work with your lender to find the best option for you. AmOne can assist you in the process, use the mortgage calculator to input your anticipated interest rate and see how changes in the rate could impact your payments. AmOne can also connect you with many other financial services such as finding the right lender, or working on your credit in an effort to get a lower interest rate on your mortgage. Contact AmOne today to learn more about their free services.