If you’re looking for home financing, especially if this is your first time buying a home, you may be confusing about the various terms used to describe mortgages. However, the industry isn’t nearly as complex as it might seem at first glance. Basically, there are two types of mortgages for families to consider–fixed rate mortgages and adjustable rate mortgages. We’ll give you a brief outline of each.
Fixed rate mortgages
Fixed rate mortgages, as the name implies, are loans that don’t change over the life of the loan. If your interest rate is 5.00%, it will stay at 5.00% for the entire period of the loan, assuming you make your payments as scheduled. The only thing that may change on a fixed rate loan is the amount you pay to escrow for your real estate taxes and your homeowner’s insurance. Fixed rate mortgages are generally offered in 15-year and 30-year terms. Fifteen-year loans generally qualify for lower interest rates. However, your monthly payments will generally be higher, since you’re paying your loan off in a shorter amount of time.
Within the broad category of fixed rate home loans, you’ll find a variety of different products, each with its own requirements. These include FHA loans, which are guaranteed (to the lender) by the US government, VA loans, which are available to US service members and veterans, and conventional loans. These products are available from multiple lenders, including banks, credit unions and mortgage brokers.
Fixed rate mortgage loans are a good choice for families who want to know exactly what they will be paying for their home loan for the duration of the loan.
Adjustable rate mortgages
An adjustable rate mortgage, often called an ARM, is a loan where the interest rate is subject to change during the life of the loan. The rate is generally tied to a financial index and could go either up or down, depending on the state of the economy. (Keep in mind that interest rates are generally lower in a healthy economy and increase in a recession or an economic downturn.) Not all ARM mortgages rates will adjust downwards; some only go up. It’s important to carefully check the terms of the loan you are considering.
With an ARM, the initial interest rate is generally lower than with a fixed rate mortgage. The rate is then reevaluated at let intervals, most commonly every year, every three years and every five years. Adjustable rate mortgages can be beneficial for families who aren’t planning on living in their new home for the entire period before reevaluation. This might include families in the military or on a short-term job assignment.
Another point to keep in mind is that some ARM loans carry a penalty for paying off your loan before its maturity date.
To learn more about financing your next home, contact The Potempa Team today! We have more than 25 years experience helping families like yours purchase their homes.