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Adjustable rate vs fixed rate: Which mortgage is right for you?

For many first-time home buyers in Chester County, PA, getting under a mortgage program is usually the most viable course they take to finance their plan of owning a home here. But once they begin looking for the best mortgage for this endeavor, they’re faced with having to choose between two options: getting a fixed-rate mortgage or an adjustable-rate mortgage.

The first piece of real estate advice you’re likely to receive for buyers like you regarding mortgage will be about knowing how long you plan to live in this house that you intend to buy. From there, the road to making the right choice of mortgage begins.

Let’s understand the differences between a fixed-rate mortgage and an adjustable-rate mortgage.

What is a fixed-rate mortgage?

When you find a house that you feel you can settle in for a long time, the best mortgage for you should be one with a fixed rate. Under this mortgage, you pay the same interest rate for the entire payment duration. This is also good for people on a budget who want predictability and stability.

Under this mortgage, be ready for loan terms that will last for 10, 15, 20, or even 30 years. The longer the term, the higher interest to pay.

Try using an online mortgage calculator for a general idea of how your mortgage payments would be. As you compute, know the factors that can increase your chances of getting your mortgage application approved, as well as those that will affect your dream home’s total cost. The latter includes:

  • Your loan term
  • Your mortgage’s interest rate
  • Your credit score
  • Homeowners insurance
  • Homeowner’s association fees
  • Property taxes

Types of fixed-rate mortgages

When paying a fixed-rate mortgage you can choose between two options:

  • Amortized loans. A popular option, this loan follows the lender’s schedule of payments —plus interest—in installments over time.
  • Non-amortized loans. Also known as balloon payment loans or interest-only loans, this option allows you to put off paying a part of the loan within a set time. The balloon payment allows you to delay paying the interest until the end of the loan term. Meanwhile, an interest-only loan lets you repay the principal later on in the loan term.

What is an adjustable-rate mortgage?

A slightly riskier option, the ARM is known for its changing interest rate. Usually, you start by paying a fixed interest rate for a set time period – a rate that’s usually lower than your regular fixed-rate mortgage. Beyond this period, your rate will adjust based on the movement of local real estate market trends and Feds-approved interest rate changes.

Types of ARMs

  • Hybrid ARM. This is your common adjustable-rate mortgage where you pay a fixed interest rate for a certain amount of time before your interest rate rises or falls with market movements.
  • Interest-only ARM. Under this loan, you’ll only pay the interest for the first 3 to 10 years. After this, you’re bound to pay both the interest and the amount you borrowed.
  • Payment-option ARM. When you pay back this loan, you can pay the money you borrowed plus interest or you can pay interest only or even a minimum amount. However, the danger is that if you lose track of your payments, you may end up owing more than you’re ready to pay when the loan term ends.

With low interest rates, you may be able to save more with an ARM, but know the risks:

  • You may end up paying more depending on your loan adjustment.
  • You may be able to afford an increase in payments now, but things may change in the future.
  • Monitoring changing rates and payments can be stressful.

Do note that ARMs will work well for:

  • People who won’t stay long. They plan to move elsewhere before their interest rate changes, and they want to save on payments before they relocate.
  • People expecting a raise. They are sure their income will increase once the ARM adjusts. One example is someone who has bought a house a month before getting promoted.
  • People with sure savings. These are people with the capability to pay off an ARM before the interest rate changes because they either have money in the bank or they just sold their old house and are ready to get a new one.

Make the right mortgage choice with RE/MAX Direct

Choosing a mortgage that suits your lifestyle will help you save money and avoid heartaches. Before you decide, make sure you explore your options with a real estate professional who can provide you with the best advice not just for buying a home but also for adeptly financing the purchase.

And if expertise and deep knowledge of real estate trends in Chester County, PA is what you’re looking for, our award-winning team of agents and Realtors at RE/MAX Direct is here to see that your requirements are met. Call our team at 610.430.8100 or email us at remaxdirectwc(at)gmail(dotted)com for your queries.