September 28, 2021
If you’re thinking about buying a home, it’s never too early to determine what mortgage option is right for your situation. At Premium Mortgage Corporation, we have several different loan options to choose from, but today we’re going to focus on two popular conventional loans: the fix rate and the adjustable rate mortgage (ARM). Both loan options certainly come with their benefits and nuances, so let’s show you the situations in which each could be best for your needs.
Fixed rate mortgage
With a fixed rate mortgage, your rate is locked for the life of the loan, which keeps your mortgage payment the same every month. It’s generally available as a 10, 15, 20, 25, or 30-year term. The shorter the term, the higher your monthly mortgage payment will be. However, by paying off the mortgage quicker, you’ll pay significantly less in interest over the life of the loan.
A fixed rate could be right for you if…
- You want term options. 10, 15, 20, 25, or 30 years are typically the terms you can choose from. So, if you’re someone who’s fine with a higher monthly payment knowing you’ll save thousands on interest over time, a 15-year fixed might be for you. But if you simply want the lowest possible monthly payment, a 30-year fixed is generally the route to take.
- Rates are low. Locking in a rate when they are lower than normal can be a smart financial decision. If rates begin to climb, it won’t matter because you’ve already locked in your rate for the duration of the mortgage.
- You’re budget-conscious. Since your mortgage payment stays the same throughout the life of the loan, it can make short-term budgeting and long-term financial decisions easier to consider.
- You value peace of mind. Knowing that your interest rate and monthly mortgage payment will never change might make you sleep easier and allow you to put your focus elsewhere.
Adjustable rate mortgage
An ARM begins with a fixed interest rate for a specific number of years, and then that rate can change periodically. Those fixed rate periods can vary based on the loan terms, but they generally last for the first five, seven, or 10 years of the loan. ARM interest rates usually begin lower than a traditional fixed rate mortgage, but then the rate will adjust based on the market index. Depending on the type of ARM loan, the rate adjustment periods may vary anywhere between every six months, 12 months, or 60 months throughout the life of the loan. The adjustment periods will be disclosed/reflected on the ARM disclosures. It’s important to keep in mind that the rate adjustments will also change your monthly mortgage payment.
An ARM could be right for you if…
- You plan to move soon. In this scenario, you can take advantage of the low, initial fixed rate because you know you’ll likely relocate before the interest rate adjusts, and potentially increases.
- You except an increase in income. The unpredictability of the adjustable rate might not be a concern if you expect a raise from your employer or if you plan to go from a one income household to a two income one by the time the rate changes.
- You want to pay down debt immediately. Since you’ll start with a lower interest rate, an ARM can help those borrowers who want to pay off debts like car or student loans while they have a lower mortgage payment.
- You’re okay with the complex nature of the loan. ARMs are unlike fixed rate mortgages in that they can be more complicated in their rules and structure. With an ARM, it’s critical to keep a close eye on your rate, especially once the fixed rate period is close to ending.
Regardless of which mortgage option you choose for your home, one thing is for sure: choosing our loan experts to help you get there is always a good decision. Get in touch today!