Fixed or Adjustable? Take the Guesswork out of the Mortgage Game
There’s an old saying in real estate—the house you look at today and don’t pull the trigger on until tomorrow might be the same house someone else looked at yesterday and plans to buy today.
- The first step in the homebuying process is to get preapproved for a mortgage. You’ll learn exactly how much house you can afford, while letting sellers know you’ll be presenting an offer that won’t fall apart 30 days before closing.
- The next step is to decide what type of mortgage is right for you. For most potential homebuyers, fixed-rate mortgages or adjustable-rate mortgages will help you get into the home of your dreams—on terms that fit your family’s individual needs.
As with other types of loans, you’ll pay both principal and interest, no matter which mortgage you choose. Let’s take a look at both types of loans, so you will have a better idea of your options when you contact a BayCoast Mortgage lending professional
Fixed-rate mortgages are the backbone of the mortgage lending business. They are most commonly available in 15- and 30-year terms (the length of time you’ll be paying the mortgage). Homeowners who choose fixed-rate mortgages “lock in” their interest rate at the beginning of the mortgage—their rate and payment will never change over the life of the loan.
Because an interest rate is locked in, fixed-rate mortgage payments aren’t affected by marketplace influences. This makes fixed-rate mortgages attractive to budget-conscious homeowners. In fact, the only reason a fixed-rate mortgage payment will ever change is if escrow for property taxes, homeowners insurance or HOA dues—additional costs that are commonly rolled into mortgage payments—is ever adjusted.
A 15-year mortgage allows homeowners to lock in lower rates, pay less interest, and pay off their homes more quickly. However, it’s important to remember that the overall monthly payment on a 15-year fixed-rate mortgage will be higher, since you’re paying off a larger part of the principal with every payment.
If you’re looking for a lower monthly payment, but still want the stability of a fixed-rate mortgage, a 30-year mortgage may be right for you. Your interest rate may be a bit higher (compared to a 15-year loan), but your monthly payment will be more wallet-friendly, since the amount of money you’re repaying is spread out across 360 (30 years x 12 months) equal payments.
An adjustable-rate mortgage (ARM) actually has a 30-year term length, but offers homebuyers lower interest rates for the first five, seven, or 10 years. Usually, the shorter the term, the lower the interest rate tends to be. At the conclusion of the term you’ve selected, the amount of interest you pay could adjust based on market conditions. This means your rate could increase, decrease, or stay the same—it just depends on how the market is behaving at the time.
If you’ve already started looking at mortgage rates, you may have noticed a bunch of numbers that look like fractions. Don’t worry, you’re not back in math class; but you should take a minute to understand what they mean.
Take 5/1, for example. The “5” lets you know that you’re looking at an adjustable-rate mortgage in which your interest rate is fixed for five years. Then, once the initial five-year lock ends, your rate (shown by the “1”) could adjust each year.
Remember when we talked about your individual needs earlier? This is where you have an opportunity to make a wise financial decision. Let’s say you know you’re going to stay in your next home for just four years. If that’s the case, why take out a 30-year, fixed-rate mortgage, when you could reap the benefits of 5-year ARM payments that could be much lower?
If plans change and you decide to stay in your home for a few more years, you may be able to refinance if your rate is going to rise.
The difference between a monthly fixed-rate payment and a short-term ARM payment can be significant. Why not put that extra cash to good use making home renovations, boosting your savings, or planning for the future?
One final note on adjustable-rate mortgages: When doing your research, think of the initial rate as an “intro rate.” From an economic standpoint, it’s important to look at the maximum amount that you could be paying if your rate adjusts to its cap—the highest interest rate you’d be required to pay.
We’re Here to Help
When it comes to the type of mortgage you choose, every family’s goals and dreams are different from the next. Contact us, or call 877-466-2678, and let one of our experienced BayCoast Mortgage lending professionals walk beside you on your path to homeownership.