What is the best mortgage interest rate for me?
There are two types of mortgages available when it comes to the best mortgage interest rate available. The two are the following: fixed-rate mortgages and adjustable-rate mortgages or ARMs. So, how do you determine the best mortgage interest rate most fitting for you?
Both fixed rate mortgage and adjustable rate mortgage have different features. Thus, it depends on the borrower to choose what works best for them. Components such as loan term, the index utilized by the loan specialist, and the number and timing of rate adjustments matters. It also matters whether you care about the increase or decrease of future interest rates. All these factors have an impact to determine which is a better option between fixed and an adjustable-rate mortgage.
Fixed-Rate Mortgages
Fixed rate mortgages, also known as vanilla wafer mortgage loans, don’t require you to pay the same amount of interest rate throughout the term of the loan. Borrowers who don’t want their interest rates to rise over the term of their loans will most probably prefer fixed rate mortgages.
The total amount of interest that the borrower pays depends on the mortgage term but the rate of interest is fixed. Traditional lending institutions offer fixed rate mortgages at 15, 20 and even 30 year terms. If you’re looking to pay low monthly payments, you should look in to a 30-year mortgage. However, if you want to pay out your mortgage faster, with a 15-year mortgage, you will have higher monthly payments. Honestly, at the end of the day, it depends on what you are looking for.
Advantages of Fixed Interest Rates
There are certain advantages of having a fixed rate mortgage. If the interest rate rises, you will be protected by sudden and potentially significant increases in monthly payments. After all, you decided to pay a fixed amount throughout the life of your loan by choosing a fixed rate mortgage. Fixed rate mortgages are easy to understand, and vary little from lender to lender. Thus, your mortgage payment stays the same even if you get a divorce, the economy slumps, or if you lose your job.
Fixed-rate mortgages make it easier to budget for the future. I mean, the interest rates on the loans stay the same; thus, your payment also stays the same. In effect, the make of this loan gives you confidence over the life of the loan. Borrowers with a lower appetite for risk are usually well-served by selecting a fixed rate mortgage.
Disadvantages of Fixed-Rate Mortgage
There are some disadvantages to fixed-rate mortgages. If you decide to choose a fixed-rate mortgage, you won’t be able to save money when interest rates drop unless you refinance. Refinance can be too expensive for borrowers. It requires a few thousand dollars in closing costs, another trip to the title company’s office, and several hours spent digging up tax forms, bank statements, etc.
The total cost of getting a fixed-rate loan is higher at the end of the loan than if you get an adjustable-rate mortgage.
Adjustable-Rate Mortgages
An ARM or adjustable-rate mortgage is based on an underlying benchmark interest rate that changes periodically. Hence, an interest rate on this loan can fluctuate over time. If the underlying interest rate decreases, then the variable rate interest rate also decreases. In the other words, the starting interest rate will be same which is called the “initial rate period.” After some months, the interest rate will change according to the underlying benchmark interest rate.
Advantages of Adjustable-Rate Mortgages
An adjustable-rate mortgage is comparatively cheaper than a fixed-rate mortgage, at least for the first seven years. When there is a decrease in interest rates, the adjustable-rate mortgage automatically decreases the monthly payment of the borrower. Compared to a fixed rate mortgage in ARM, a lower initial monthly payment and interest rate potentially allow the borrower to qualify for a larger mortgage amount.
Thus, if you have any knowledge of current market conditions changing and interest rates coming down, an ARM is a better choice for you. Furthermore, to decrease the total balance of your loan, you can pay more than your monthly payments. If the interest rate falls, an ARM’s cost will be low while the fixed-rate mortgage remains the same.
Disadvantages of Adjustable-Rate Mortgages
If a you always choose the lower payment option, it could end up badly for you. You might expect interest rates to drop, but they could end up always increasing. This would affect your ARM negatively. A higher interest rate could make your monthly payment go up. Hence, the ARM is not for making long-term financial plans. The interest rate usually gets fluctuated.
Final Thoughts
Whether you choose a fixed-rate or adjustable-rate mortgage, choosing the best mortgage interest rate depends on several factors. Look into your present income so you can determine how much you can afford. You’ll need to know what your limits are in terms of what you can actually afford with your present income. You must look into the type of loan term you want. The number and timing of rate adjustments matters as well. Do you care about the increase or decrease of future interest rates? Does that factor affect you?
It may sound like a lot to take into consideration. However, it makes a huge impact and helps make a final decision to determine which is a better option between fixed and an adjustable-rate mortgage. 3CALoan can actually tell you when a fixed or adjustable-rate mortgage makes the most sense. As long as you can tell us a little about your budget, we will sort out your every problem.
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