When you begin the homebuying process, you learn quickly there are a myriad of different mortgages to choose from. It can be overwhelming to learn the ins and outs of each type and to make the decision on which to go with. Of course, this is a decision that can be made with the help of a mortgage professional, which will help to alleviate pressure. However, it doesn’t hurt to be informed on the different types of loans ahead of time.
This is why we’re going to help inform your decisions with a short blog series of different types of loans. In this blog, we will cover the difference between fixed- and adjustable-rate loans.
Fixed-rate loans are exactly what they sound like, the rate is fixed, meaning it will not change, for the life of your loan. The rate is agreed upon when the loan is originated, and cannot be changed. These types of loans are often chosen by people who are settled in a career and know they want to be in the home for at least the life of the loan, or close to it. The biggest advantage to these loans are that you know exactly what you will be paying the entire duration of the loan.
Adjustable-rate loans are also exactly as they sound, the rate of the loan will not remain the same. Most adjustable-rate loans start with a lower rate than fixed-rate loans, and the rate may remain unchanged for a number of months or years. After that period, the interest rate will most likely increase. The rates are tied to something broader, the interest rate index, and will most likely increase and decreased based upon that, although not always.
Adjustable-rate loans are most attractive to first-time home buyers, or buyers that are advancing in their careers aren’t exactly sure where they will be in ten years. A common mistake buyers make when choosing an adjustable-rate loan is assuming they will be able to refinance before the rate changes. It is never safe to assume your financial situation will stay the same, or even improve. Those changes in your financial situation could lead to different options, whether good or bad, being available to you in the future.
As you can see, there are obvious advantages and disadvantages to both types of loans. Different mortgages are made to benefit different people. Which is why you should never rely on a friend’s recommendation, as their situation may be vastly different from yours. Always consult a mortgage professional when making this decision and, as always, we would be happy to answer any questions you may have. Click here to email Brent today!