Buying a home is a significant step in a person’s life. It’s the biggest investment most people will ever make, and it comes with a long list of important decisions. One of those is which financing option to choose. Most aspiring homeowners can’t simply purchase a home outright; instead, they need a loan to cover the majority of the cost.
If you’ve done even basic research on mortgage loans, though, you’ve probably realized that there are numerous options available. Fixed and adjustable loans are a couple of the broadest categories. Understanding these different mortgage loan options can help you choose the best one to suit your needs and budget both now and in the future.
Taking a Closer Look at Fixed-Rate Mortgages
With a fixed-rate loan, your interest rate will stay the same for the entire duration of your loan. That means your monthly payments won’t change. This level of stability is what makes fixed-rate mortgages so popular among homeowners. They know exactly how much their mortgage payments will be from one month to the next. As such, they can more easily plan and budget for them.
General interest rates tend to fluctuate from time to time. When they go up, they cause mortgage payments to follow suit for homeowners who don’t have fixed-rate loans. That can leave them with a certain amount of uncertainty, but fixed-rate mortgages don’t come with that level of ambiguity.
That being said, fixed-rate mortgages can leave homeowners paying more interest than necessary. Just as interest rates go up at times, they can also drop. With locked-in rates, you won’t be able to take advantage of those decreases. That means your mortgage payments might be higher at times than they’d be with an adjustable-rate loan.
Delving Deeper Into Adjustable-Rate Mortgages
That brings us to adjustable-rate mortgages, or ARMs. Instead of having a fixed rate for the entire term of a loan, adjustable rates can change at times. Most ARMs start with low, fixed interest rates for a certain period. After that, they’re adjusted once per year. They can go up or down depending on the current market rates.
Adjustable-rate mortgages are attractive to homebuyers because of their initial lower rates. They also allow you to take advantage of those times when rates drop. That said, there’s also the risk of your monthly payments increasing with an ARM. That could make future payments difficult to manage.
ARMs are often best for people who don’t plan to stay in a home for very long. They can provide short-term savings, but they don’t offer protection against upticks in interest rates. They don’t come with the same level of predictability as fixed-rate loans, either. While they can help you save money in the short-term sense, they can ultimately cost you more overall.
Choosing the Right Mortgage Loan for You
Several mortgage loans are available to homebuyers, and they generally fall into one of two categories: fixed or adjustable. Each one has its own benefits and disadvantages. Fixed-rate mortgages offer stability and predictability whereas adjustable-rate loans typically come with lower initial interest rates. Though the latter can save you money for the first few years of the loan, it may cost more beyond that point. Keep these factors in mind to help you choose the best mortgage loan to suit your needs.
