If you are a new homebuyer or any homebuyer for that matter, there is one thing you need to figure out when deciding on the type of loan you are looking to get. You need to figure out if you are better suited for a fixed-rate mortgage or an adjustable-rate mortgage. Both of these loan options have their benefits, but it is going to be up to you and your loan officer to determine which direction is right for you. If you have purchased a home in the past the same loan type you had originally might not be the best option for you now. Don’t just assume that you are in the same position as you once were.
A fixed-rate mortgage is by far the most popular among mortgage products and rightfully so as it is the one loan that everyone talks about and you hear about most often. With this type of loan this lets you lock in your interest rate for the duration of the loan. Given this, your monthly payment of principal and interest will never change for the life of the loan. Yes, your taxes and insurance will change, but your base payment of principal and interest will not. Given the stable payment over the life of the loan, it is very easy to budget for this expense if you are a new homebuyer. There won’t be any surprises as your payment locks in to the same amount monthly.
Given the fact that the loan is very predictable, you may be wondering what the downside might be to having one of these loans. The main difference is that you will more than likely have a higher interest rate on a fixed-rate mortgage versus an adjustable-rate mortgage. If it is in your best interest to keep your interest rate fixed, then you will probably end up paying for this security in the short-term. Since an adjustable-rate mortgage is normally for a time between 1-7 years normally, you will be paying more for your loan during this time.
However, if you are planning on holding the loan for a long time or the duration of the loan, you may end up saving money after your adjustable-rate mortgage adjusts. The best way to save money on a fixed-rate mortgage is to ensure you are the best borrower in the eyes of the lender. This starts with your credit score and if you can have a FICO score of 700+ you will make sure you get the best available rate. Another option is to choose the proper term of the loan for what you can afford.
You can get fixed rate loans mostly in 15 or 30 year varieties. If you can afford the extra payment per month, the 15-year mortgage will save you thousands of dollars in interest as you are paying the same loan off 15 years sooner versus the 30-year mortgage.
An adjustable-rate mortgage, or ARM, is a mortgage that typically offers a lower fixed interest rate for the first 1-7 years of the loan, but after this time is up the rate can change annually depending on the current market conditions. What happens is after the initial period is up, the loan will normally adjust to a rate for the next year by calculating the “Index” plus the “Margin.”
The index is in reference to LIBOR (London Inter-Bank Offer Rate) or a benchmark rate and added to this is the margin, or the fee paid to the lender. For example, if your loan is due to adjust and the LIBOR is 3% with a 2.5% margin, you interest rate will be 5.5% for the next year. You can now see that as the benchmark changes up or down, your payment will also adjust accordingly. This is why it is considered a “gamble” when borrowers take on this loan as they are at the mercy of the benchmark after their initial period as passed.
Now you may think that adjustable-rate mortgages are bad, but this is not the case as there are definitely scenarios where this type of loan will benefit the borrower. For an individual who only sees themselves living in the home for a few years before selling it, then yes this makes sense as you will get the lowest interest rate you can for the time you will be in the home. A lot of people you travel to different locations for work will see this option valuable as they won’t be attached to a home for that long and can hopefully sell it when the time is right.
There is no right loan for everyone which is why the mortgage industry has options for you and your situation. Hopefully the reasons I have mentioned will shed some light and give you some intuition into which loan is right for you when that time comes to purchase a home. If you work with an experienced loan officer like myself we can go through all the payments and terms of loans to determine the break-even point of these loans and for what amount of time which loan will be better for you.
I don’t like seeing loan officers who are lazy and only want to offer you a fixed-rate mortgage as this is not always the best case given the situation of the borrower. I can guarantee that I will take a vested interest in your future and make sure you get that absolute best deal whether it is with a fixed-rate or adjustable-rate mortgage. If you want someone with experience on your side please don’t hesitate to call me at 888-900-1020 or email me directly at contact@loanconsultants.org. The team here at loanconsultants.org are only looking out for your best interest as that is our motto and that is what we do. We want you to be informed and happy with your loan and new home.