There are two primary mortgage types: the adjustable-rate mortgage (ARM) and the fixed-rate mortgage (FRM).Within these two categories are many different variations, but deciding which one of these options is best for you is the first step in creating your home loan. Read below to gain a better understanding of what these loans are and which one is best suited to your needs.
A fixed-rate mortgage is just what it sounds like, a loan for which the interest rate is fixed throughout the life of the loan. Your month-to-month mortgage payment will stay the entire time you spend paying off your mortgage, which is the loan’s main advantage.
The most common loan type on the market is the 30-year fixed-rate, as it provides the lowest monthly payments for borrowers. The tradeoff for those monthly payments, though, is that you’ll pay much more in interest when you’ve eventually paid off your loan.
ARM’s are less straight-forward than their fixed-rate counterparts. The initial interest rate that you purchase or refinance into is not the one that will stick with you throughout the life of the loan. Most adjustable-rate mortgages rates begin to adjust after five to seven years. After the initial adjustment, rates will adjust according to an adjustment frequency: the amount of time between interest-rate adjustments. The most common adjustment frequencies are monthly and yearly.
If you have an adjustable-rate mortgage for long enough, your interest rate will surpass the going rate for fixed-rate loans. This reality makes ARM’s popular for homeowners who are buying a home for the short-term, or for those who do not qualify for a fixed-rate at the time of purchase.
Questions to Ask Yourself
- How much can I put towards a monthly mortgage payment today?
- Can I still afford an ARM if rates rise?
- How long do I plan on living in my home?