August 31st, 2017
Looking for a house can be exciting. Looking for the right mortgage and interest rate? Not so much. There's no argument: the financial considerations of a purchase can be confusing and stressful. Learning the basics can help you better understand your needs and give you a firm foundation on which you can build your search - but it's always advisable to speak with a qualified lender before you decide.
Mortgage rates - the basics
Generally speaking, mortgages can be broken down into two main types: fixed rate and adjustable rate. The difference between the two is surprisingly simple and is in their names:
Which loan type you choose - just like your house - is based on your needs, specifically in the short and long term. Fixed rate loans are typically recommended for people intending to stay in their homes for a long period of time, while adjustable rate loans are better suited for those looking to the short-term. But let's examine this a little more closely.
Fixed rate loans
Why are these best for people looking at the "long picture?" Primarily because nothing changes throughout the life of the loan - the rate will remain the same, regardless of changing marking conditions, and so will the monthly payment. Over the standard 15- or 30-year mortgage, that kind of predictable stability can be very attractive.
As with an adjustable rate mortgage, whether you choose a 30- or 15-year fixed rate mortgage comes down to time. If you are looking for a shorter payoff period or don't think you will be in the house in 30 years, a 15-year loan may be a good choice. However, it is important to understand the tradeoffs for the shortened timeframe: 15-year fixed rate loans typically have lower interest rates than 30-years and you will build equity more quickly; however, you will have a higher monthly payment due to the compressed schedule.
Adjustable rate loans
Adjustable rate loans, or ARMs, are attractive if you are a short-term homebuyer - or are willing to accept a level of risk - because they do just that: adjust. Depending on the term and terms of the loan, the initial rate - often considerably lower than that on a fixed rate loan - will remain unchanged for a set period of time, after which it will continue to adjust to the current rate. This adjustment can occur periodically - say, once or twice a year - or every month, depending on the loan.
The initial low rate is what makes this kind of loan attractive because it allows you to purchase "more house" than if you went with a higher-rate fixed loan. The lower monthly payments - at least during the fixed period - will also allow for more "in pocket" or investment money each month. The drawback, of course, comes once the fixed period ends, because you are at the mercy of fluctuating rates that could be considerably higher and more volatile than when you locked in at the start. As a cautionary note, many of the people most severely impacted by the housing crisis held adjustable rate loans and were helpless when their fixed periods ended and rates skyrocketed.
Speak with a trusted mortgage professional
Buying a home is one of life's most important decisions, and how you finance it is even more critical. The mortgage world is complex - and when it's time for you to consider your options, the best place to start is with a mortgage professional who can help you examine your current and future needs and goals, and guide you throughout the entire mortgage process, from selection to close.