Whether you’re a first-time home buyer or a home-buying veteran, shopping for a mortgage loan can be overwhelming. The options seem endless with dozens of lenders, rates, terms, conditions and costs. Narrowing your search can be as simple as figuring out what type of mortgage is best for you: fixed or adjustable rate.
Fixed-rate mortgages are loans that have a defined length of repayment, otherwise known as the term. The most common terms for first mortgage loans are 15 and 30 years. The interest rate remains the same for the duration of the loan. The monthly payment is calculated by using the loan amount, term and interest rate. Since the rate and term are fixed, the monthly payment remains the same.
Adjustable Rate Mortgages (ARMs) are loans that have a pre-defined period of time during which the interest rate stays the same. A typical ARM loan is a 5/1. That means that the rate is fixed for the first five years of the loan and then can adjust each year thereafter. The rate can adjust based on market and contractual conditions. That’s to say, if market rates are higher than when the loan was opened, the rate can go up. If the rate goes up, so does the monthly payment.
So, which type of mortgage is right for you? The answer really depends on these 3 factors.
How long do you plan on being in the home?
Typically, ARMs are a better choice for borrowers who have a short horizon. For example, if you’ve moved to a new city for your job and don’t plan on being in the new location for more than a few years an ARM is a good choice because of the lower rate and payments associated with the loan. Lower rates can help buyers qualify for the loan and make monthly payments more affordable.
For borrowers who plan on staying in their home for the long haul, a fixed rate mortgage will help spread the costs over the term and they won’t have to gamble on whether the monthly payment will increase.
Are you concerned with cash flow?
ARMs certainly have the benefit of lower initial payments. Lower payments may also allow the borrower to afford a higher-cost home which usually means they can get more for their money. ARMs are also a good choice for people who anticipate increased income. Perhaps, there is a promotion or a higher-paying job on the horizon. So, higher future payments are offset by increased income.
What’s your risk tolerance?
Fixed-rate mortgages are the more stable choice while ARMs are the riskier alternative. You should measure your appetite and ability to pay a fluctuating monthly payment. If you are comfortable with a lower payment now and are willing to accept the potential of higher payments if rates go up, then an ARM is the right choice. If you prefer a steady payment, then look no further than a fixed-rate loan.
Of course, Pacific Service Credit Union offers a full array of mortgage products and we will be happy to help you make the best decision for your situation. Simply call a friendly member service representative at (888) 858-6878.
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