With mortgage rates at some of the lowest levels in decades, many borrowers are considering whether a fixed rate or adjustable rate mortgage is better suited for their needs. We are going to walk you through the two main mortgage options that you can select from, along with the core benefits and some of the negatives associated with each.
Fixed Rate Mortgages
With a fixed rate mortgage, your interest rate and monthly payments remain the same throughout the term of the loan:
- There is no risk of your monthly mortgage payments changing at any point during the course of the loan. This means as long as there are no drastic changes to your lifestyle, you should always be in a position to pay the mortgage amount comfortably.
- A fixed interest rate is typically higher than whatever the going adjustable interest rate is since you are offered more stability.
- Throughout the term of your mortgage, there is no change to the amount applied to principal versus interest, it always takes the same course as per the amortization schedule.
- If interest rates go down you don’t have the opportunity to take advantage of this move as you may with an adjustable rate mortgage.
Adjustable Rate Mortgages
With adjustable rate mortgages, your payment amount is determined by the initial mortgage rate fixed for a 3, 5, 7 or 10 year term, which presents some interesting pros and cons:
- With a adjustable rate mortgage, there is the potential that you can pay much less than you would with a fixed rate mortgage, but if interest rates go up, you could also pay much more as you do not have a guaranteed future rate once your “fixed rate” period is complete.
- You don’t have a guaranteed monthly payment amount, and you may have to tighten the purse strings on other spending when interest rates rise.
- Adjustable rate mortgages can allow you to pay down your mortgage with more money applied to principal depending upon what interest rates are doing at any given time.
- In order to be eligible for a adjustable rate mortgage, you may need be approved to pay a monthly payment amount higher than what you’d pay based on the interest rate at the time in a fixed rate loan. The regulations can vary by lender or state, but this ensures that your mortgage can always be paid.
Still have questions about whether an adjustable rate or fixed rate mortgage is best for your needs? We can help walk you through any questions you have to find the loan that best fits your needs.