When shopping for a home or investment property, buyers are also responsible for choosing the right loan to fit their needs. A fixed rate mortgage and adjustable rate mortgage are the two most popular types of home loans.
Even before a potential buyer finds the perfect home or investment property, it’s essential to identify the best-suited loan products. Understanding the key differences between a fixed-rate and adjustable rate mortgage early helps buyers get prequalified. Which shows sellers you are prepared when it comes time to finalize the sale.
Often called an “ARM,” these types of home loans typically offer qualified borrowers low interest rates during the introductory period. After that time expires, the interest rate is calculated on a monthly or yearly basis against a standardized index.
For example, a 5/1 ARM has a five-year fixed mortgage rate period. Following the five-year introductory period, the annual interest rate is recalculated 1-time each year. People who select an adjustable rate mortgage enjoy low interest rates before any changes occur. These types of home loans may also provide options to refinance to a fixed mortgage if rates are on the rise.
These types of mortgages offer qualified borrowers an interest rate that remains the same throughout repayment. Typically, with these types of loans, the monthly payment will not fluctuate, with the exception of taxes or homeowners insurance increases. In many cases, you are able to lock in a low mortgage rate for a term of 15 – 30 years for a small service charge.
At a glance, the difference between these types of mortgage loans appears to be the fluctuating versus fixed interest rate. While that certainly is a key difference, there are long term effects of these differences. If you are mortgage shopping, consider the following
It’s important to understand that one type of home loan is not necessarily better than another. The goal is to select the option that best serves your interests and finance goals. Weighing the pros and cons of a fixed rate mortgage is important before you decide on which loan option is for you.
These types of home loans are not necessarily used for the same reasons. In other words, buyers may consider the potential savings over the life of the loan as just one factor among many.
A fixed rate mortgage may make perfect sense for community members who intend to put down roots, raise a family, or pursue career goals in an area. And a fixed rate loan may also fit into a long-term business plan that involves buying and operating an investment property.
An adjustable rate mortgage serves as an great option to finance short-term business goals. Developers and house flippers who buy and rehabilitate properties can take advantage of low interest introductory periods. By selling a real estate investment relatively quickly, investors can turn higher profits.
Another scenario that tends to make an adjustable rate mortgage a more favorable option involves relocation. When people know they will need to move for work, military service, or other reasons, an adjustable rate mortgage typically provides the lower monthly installment, all things being equal. In such cases, borrowers benefit from the introductory period with little concern about the adjustable phase.
Applying for an Adjustable Rate Mortgage or Fixed Rate Mortgage can be a relatively straightforward process. Consider checking your credit score by reviewing a free copy of your credit report. Clear up any errors or inconsistencies by reporting them to Equifax, Experian, or TransUnion.
If you are still unsure which mortgage is best for your financial situation, contact Allegiance today to speak with one of our trusted home loan professionals.