Although there is a wide array of mortgage types and home loan programs, the two most common loans chosen by modern homeowners are fixed-rate and adjustable-rate mortgages. While the current marketplace features a myriad of varieties within these two primary loan types, the most important step when it comes to finding the best home loan for you is understanding the genuine difference between each loan type. It’s only with this understanding you’re able to make the best decision for your financial future and stability.
Fixed-Rate Mortgages | A Basic Understanding
These are perhaps the most common mortgage loans as their interest rate is just as its name implies. Throughout the duration of the loan, the interest rate on the loan is fixed, which means it does not adjust. However, the amount of each payment applied to the principle and interest of the loan will adjust from payment to payment. Regardless, the actual monthly payments will never increase or decrease. This is ideal for those who wish to have a stable monthly payment, which helps simplify budgeting.
The primary advantage of a fixed-rate mortgage payment is the loan is protected from erratic and potentially high increases to payments. If this is your first time dealing with home loans, many find a fixed-rate mortgage to be ideal as it’s easy to understand; however, if you have a lower-than-desired credit score, you could be facing high interest charges throughout the duration of the loan, which results in paying tens of thousands of dollars on pure interest. Therefore, it’s a popular choice among those with good credit and perhaps an unwise choice for those with lower credit. If you are wondering what is a good credit score, it’s usually anything above 750.
Adjustable-Rate Mortgages | A Basic Understanding
Just as its name suggests, an adjustable-rate mortgage is a mortgage where the interest rate fluctuates as the market changes. The majority of these loans begin with a fixed-rate that’s relatively lower than the market average. However, this fixed-rate portion only lasts one to 10 years. After the introductory time frame is completed, the interest rate then adjusts based on the current market. The rate of adjustment is based upon a pre-arranged frequency, which is made clear before you agree to the loan terms.
For many, an adjustable-rate mortgage is the ideal choice as its initial rate is quite low, which makes the monthly payment affordable. However, after this preliminary period, the monthly payment can significantly increase based upon the current market values and the percentage of increase the lender places on the increased rate. In fact, some adjustable-rate mortgages are designed so the interest rate, and ultimately the mortgage payment, can literally double within a span of a few years. Therefore, before you agree to an adjustable-rate mortgage, you should carefully consider the future financial requirements of the loan.