Getting a mortgage is a critical step in the home buying process. As such, it’s important to do your due diligence when searching for a home loan.
Before applying for a mortgage, you need to decide which type you want: an adjustable-rate or fixed-rate mortgage. Both types have a variety of advantages and disadvantages. The right decision depends on your specific circumstances and needs.
In order to help you decide which type of mortgage to get, there are a few questions you should ask yourself before applying.
Adjustable-Rate vs. Fixed-Rate Mortgage
What’s the difference between adjustable-rate and fixed-rate mortgages?
Adjustable-rate mortgages typically start with a lower interest rate than fixed-rate mortgages. This rate will stay the same for a predetermined amount of time. After this introductory period is over, the interest rate will change and your payments will usually increase.
Fixed-rate mortgages, on the other hand, have a fixed interest rate for the entire length of your loan. While the starting interest rate may be higher than with an adjustable-rate mortgage, it will not go up over time and your payments will be more predictable.
Questions to Ask When Deciding Which Type of Mortgage to Get
The best mortgage for you depends on your specific needs and your plans for the future. If you’re having trouble deciding between an adjustable-rate or fixed-rate mortgage, there are a few questions you should ask before applying.
How Long Do You Plan to Stay in the Home?
First, you should consider how long you plan on staying in your new home. The biggest advantage of adjustable-rate mortgages int hat they offer a low-interest introductory period.
The introductory period one these loans typically last between three to seven years. If you plan to sell your home before this period is over, then an adjustable-rate mortgage might be your best option. It will allow you to capitalize on low interest rates.
However, if you plan to stay in your new house for a while, it might be better to go with a fixed-rate mortgage as you may end up paying less interest over time.
What’s Your Rate Cap?
Adjustable-rate mortgages typically have rate caps to protect borrowers from excessively high interest rates.
Before agreeing to borrow this type of mortgage, be sure to check what your rate cap would be. This will help you ensure that your mortgage will still be affordable as your rates go up.
How Often Would the Rate Change?
You should also ask how often your loan will adjust. Typically, interest rates on adjustable-rate mortgages change every year after the introductory period; however, this isn’t always the case.
For example, if you take out a 5/1 ARM, your interest rate would be fixed for the first five years and would adjust for every year after. Alternatively, a 5/6 mortgage would be fixed for the first five years and would adjust every six months after.
Adjustable-rate mortgages can be a great option if you plan on selling your home before the introductory period is over. Fixed-rate mortgages, on the other hand, are often better when interest rates are on the rise and you don’t plan to move any time soon.