You have made up your mind to buy a home, but are you sure that everything else will support you for buying the new home? Even if you go to a good realtor like Blu Skky Realty you will not be able
A Fixed Rate Vs Adjustable Rate Mortgage
Homebuyers across the nation and those in our own Hampton Roads backyard face a decision when purchasing a home. Which type of mortgage loan will you choose to finance your dream of homeownership? Fixed rate and adjustable rate mortgages are the two primary loan types, and while the marketplace offers a variety within these two categories, your very first step when shopping for financing will be to determine which loan type best meets your needs.
The Fixed Rate Mortgage
You might categorize the fixed rate mortgage as the safer of the two loan types. It charges a set interest rate that will not change at any time throughout the life of the loan. It’s the easiest type of loan to budget for, as the monthly payment will remain the same from the first to the last.
The biggest advantage of a fixed rate home loan is consistency. The borrower is protected from a sudden and possibly significant increase in their monthly payments, an increase they are not always able to afford. Additionally, these loans vary little from lender to lender, making them easy to understand.
The biggest disadvantage of a fixed rate mortgage is the market. When the interest rates of home loans are high, qualifying grows more difficult for one reason: the payments are less affordable. This single disadvantage culminates in one of the most common reasons potential homebuyers turn to an adjustable rate mortgage.
The Adjustable Rate Home Loan
The adjustable rate loan is just that, adjustable. The interest rate will vary over the lifetime of the loan. Initial rates are usually set below the market rate on a comparable fixed-rate loan, and the rate inflates as time progresses. If the loan is held for a long period, the interest rate will surpass the going rate of a fixed rate loan.
Adjustable rate mortgages come with an agreed upon or fixed period of time during which the introductory interest rate remains constant before adjusting at a pre-arranged frequency. The period can vary greatly from as little as one month to ten years. In general, the shorter the adjustment periods, the lower the initial interest rates.
The biggest advantage of an adjustable rate loan is instant affordability. They can make loan approval and the actual act of home buying faster. First time homebuyers who might otherwise be unable to afford a mortgage are able to gain approval for the loan and buy their first home.
The biggest disadvantage of an adjustable rate mortgage is uncertainty. It’s common for buyers who cannot afford homeownership to become homeowners via this type of loan. As the interest rate inflates, their financial footing grows more and more unsteady. It can easily culminate in foreclosure when a homeowner is unable to make the agreed to monthly payments.
The adjustable home loan is also more complex versus the fixed rate loan. It is often accompanied by specific terminology, including “adjustment frequency,” “adjustment indexes,” “margin,” “caps,” and “ceiling.” It is imperative for the borrower to review the terms of the loan thoroughly and understand the implications of all terminology.
Choosing the Right Home Loan
Selecting the right home loan type is a serious matter, and you should not allow outside lenders or home sellers to talk you into a choice. Your decision must be based on your individual needs and circumstances. You will want to consider:
The Life of the Loan: Adjustable rate loans are best kept to a short lifespan, which can automatically inflate the monthly payment scale. Whereas fixed rate loans can be short or long depending on your ability to afford the monthly payments.
Your Financial Footing Today: Is the mortgage payment affordable? Will it stretch your finances, putting you in danger of missing a payment due to an unforeseen life happening? A mortgage payment should never strain your budget. If it does, you are probably not ready for homeownership, even if an adjustable rate loan makes it temporarily affordable.
Your Financial Footing Tomorrow: If market interest rates were to rise steadily over the next five years, would you be able to afford a steadily rising or suddenly inflated monthly payment? Will your financial footing grow stronger in the future, and can you guarantee the growth?
Other factors to consider include the maximum monthly payment you can comfortably afford, how long you intend to live on the property, and the forecast direction of interest rates. An adjustable rate mortgage may be an excellent buying choice for you, especially if you don’t intend to live on the property for long. Alternatively, the fixed rate loan may provide more buying security. Ultimately, the choice is yours.
Whether it is your first home or the home you plan to retire in, I will be there to ease the process every step of the way! I find great pleasure in helping people achieve their goals in real estate a....
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