When it comes to home financing, the type of interest rate you choose can be very important to meeting your financial goals. Choosing the type of interest rate that best meets your needs can save you thousands of dollars over the life of the loan. This week, we’ll explore fixed and adjustable rates and how they affect your home loan and your financial future. Read on to learn more and do not hesitate to contact CalStar Mortgage Inc. with any home financing questions you may have.
If you choose a fixed-rate mortgage, you will pay the same amount in interest each month for the entirety of your loan. Fixed rate-mortgages are preferred by homeowners looking for long-term financial security and stability. They allow the homeowner to make long-term financial plans without fear that their mortgage payments will change in the near future. For some, this sort of security is important in creating and maintaining a stable budget. Fixed-rate mortgages are a great option for first-time homeowners as they adjust to homeownership. Typically, they have terms ranging from 10-30 years.
One of the downsides of fixed-rate mortgages is that when compared with an adjustable-rate mortgage, they may have higher initial rates. If the mortgage market improves, you will need to refinance your mortgage to take advantage of improved rates, which will mean additional closing costs and expenses.
Adjustable-rate mortgages (ARMs) have an interest rate, and subsequently a mortgage payment, that fluctuates based on market conditions. They can have a fixed interest rate for a portion of the mortgage term before switching to an adjustable-rate change on a regular basis. ARMs tend to be a bit more complex than fixed-rate mortgages with their recurring changes. They’re less predictable from a budgeting perspective than fixed-rate mortgages, which can affect borrowers in different ways.
Common ARM term options are 5/1, 7/1, and 10/1. What this means is that there is either a 5, 7, or 10 year fixed-rate period following by adjustments every 1 year thereafter. If interest rates improve this can be advantageous. The interest rate is determined based on the index, an economic indicator that determines how it increases or decreases. There is a cap on how much an ARM interest rate can rise during each adjustment period and a lifetime cap on how much it can increase over the life of the loan, which can protect clients from life-changing increases in rates.
As mentioned earlier, ARMs tend to start at lower interest rates that fixed-rate mortgages. Homeowners looking to relocate or refinance relatively soon after their purchase, ARMs may be the best choice.
Get Started Today
To more about fixed and adjustable rates for mortgages from CalStar Mortgage Inc. in La Cañada Flintridge, CA, contact us today to schedule a consultation. We are here to help further explain the advantages of each rate type and help you choose the one that best fits your financial goals.