Fixed vs. Adjustable Rate Home Loans: What are Their Differences?

The difference between fixed and adjustable home loansOnce you’ve firmly decided that buying a house is the right thing for you, you now need to determine how you’ll fund your purchase. Although there are various kinds of home loans available, the two primary kinds are adjustable rate and fixed rate. The next step is to know the differences between these two mortgage types to decide which one to apply for.

Fixed Rate Home Loan = No Surprises

Fixed rate home loans have the same interest rate over the loan term, meaning that even if interest rates go up, yours will stay the same. On the other hand, if interest rates fall, the interest rate on your fixed rate home loan would remain the same, and you won’t get to enjoy the savings that come with a lower rate.

Since your interest rate won’t budget whatever happens, you have a clear idea of how much your monthly mortgage payment would be and how you would budget for it. The only thing that could change your monthly mortgage payment is if you also pay for homeowners fees, insurance, and property taxes, and these go up.

Adjustable Rate Home Loan = A Guessing Game

ARMs or adjustable rate mortgages initially come with fixed rates, with the interest rate staying the same for a predetermined number of years. Following this initial period, however, the interest rate would then begin moving or adjusting. This means that your monthly home loan payments could likewise change. Depending on the specific loan terms, your rate adjustments could happen annually, every three years, or every five years.

Which One Should You Go With?

The best type of home loan for you should be dependent on your specific circumstances, taking into account certain crucial factors particular to your case. An ARM might be a good option if you’re thinking of selling your home in three or five years, or how much time you have before the adjustment of your interest rate. This way, you could benefit from the low interest rate during the fixed rate period of your mortgage and then walk away when your rate could potentially go higher.

On the other hand, a fixed rate home loan might be the better option if you plan on living in your house for a long time because you know exactly what your interest rate would be until you pay off your mortgage. The best thing to do is to discuss your concerns and needs with your lender to help you choose the most suitable home loan option.