Whenever you hear someone talking about a mortgage, there are usually two primary types of mortgages they will refer to. The first is called an adjustable-rate mortgage (ARM), and the second is a fixed-rate mortgage. While the names sound straightforward, there are some nuances to each that might make one better than the other in some situations.
When it comes to selecting a mortgage, your personal financial situation comes first at every step of the process. If you have your credit score, your income statements, and possibly your debt-to-income assessment, it’s time to figure out whether a fixed-rate mortgage or an adjustable-rate mortgage is best for you.
When shopping for a fixed-rate mortgage, you are really looking for a rate that you are comfortable with over the long run. A fixed-rate mortgage is an interest rate that will never change throughout the entire life of the loan. This is a good and bad thing depending on your financial situation and how you feel about making deals. Your principal amount, as well as the interest paid month to month, may vary, but the total payment will always remain the same with a fixed-rate mortgage. This is great if you know exactly how much you will make over the life of the loan and that you can rely on that income. It is also a good practice for peace of mind as you know the amount will not change in the future and you can set it and forget it.
For a fixed-rate mortgage, the initial years of payment are mainly interest payments. This changes as the loan continues sometimes as the loan is paid off over the years. The biggest upside of a fixed-rate mortgage is that when rates are low, homeowners can lock in that low rate and are protected even if interest rates rise. However, if interest rates are high when shopping for a fixed-rate mortgage, this can make the loan more difficult to attain as the payments become less affordable when the total amount is higher.
Adjustable Rate Mortgages (ARM)
As the name implies, the rate on an adjustable-rate mortgage is adjustable. This means that the rate is variable and typically rises as time passes. The benefit of an ARM is that when the loan is signed, the interest rate is likely far below the market rate for a fixed-rate mortgage. This can be beneficial if you want to keep payments as low as possible at the beginning of the life of the loan. However, eventually, the interest rate on your ARM could pass the market rate if held long enough. This is a good way to take advantage of unpredictable interest rates in some places or if you are not sure of the interest rate that you can afford.
The Final Call
Fixed-rate mortgages are a great choice for anyone who wants peace of mind with their mortgage and to know that their rate is not going to change. If rates are low, it is a great idea to get a fixed-rate mortgage and lock it in for the long run. If you are not sure of the rate you want or you want the lowest interest rate possible at the beginning of your loan, an adjustable-rate mortgage is by far the best choice.
In the end, always choose the mortgage that fits your financial situation and budget over the long term whether it is fixed-rate or adjustable-rate.
15-Year Mortgage: Is it Worth it?
For most buyers, a 30-year mortgage is the first and only option when it comes to borrowing to buy a home. However, whenever it is possible, a 15-year mortgage is the ideal choice for some homebuyers who are able to afford higher monthly payments. As suggested by the timeline in the name, this mortgage gives those homeowners the ability to pay it off in half the usual amount of time. That can be a big burden off of their shoulders and can save thousands, or possibly tens of thousands of dollars of interest on top of it.
15-year mortgages can be great but is it worth it for you? You should decide whether your income is reliable enough and whether you can support the higher payment to get your mortgage paid off sooner than later.
15-year mortgages are usually fixed-rate mortgages that will be paid off in 15 years in the case that every payment is made on time. The principal and the interest rate will be the same for as long as you hold the mortgage, so getting a 15-year mortgage when rates are low is the best possible situation.
Get More Equity Faster
Instead of waiting to put more money into your home over three decades, you have more equity in your home faster with a 15-year mortgage. This is because you are able to pay down the principal balance faster than you would with a typical 30-year mortgage.
Gain Long-Term Savings
Since you are paying off the loan faster and have less interest, you save a bundle with a 15-year mortgage. This is because you pay half as many years of interest. Additionally, lenders like 15-year mortgages because they are exposed to less risk drawn out over a shorter period of time. This means they can offer lower interest rates for 15-year mortgages, making them worth to many borrowers.
One of the things you will need to know if you get a 15-year mortgage is the larger monthly payments. The principal and interest payments on a 15-year fixed-rate mortgage can often be 505 higher than those of a 30-year mortgage. This means tying up a bigger portion of your income in your mortgage. If you are comfortable with putting more money into your housing costs, then this isn’t an issue at all. However, you should think at least 15 years down the road when considering this kind of mortgage because the ways out aren’t pleasant. If you can’t keep up with the higher payments, you will need to sell your house, refinance your mortgage, or the bank will foreclose on the home.
Buying Less Home
Higher payments, higher cost, and therefore a less expensive loan. You may end up with a smaller house or have to buy outside of your favorite neighborhood. This isn’t the end of the world for many homebuyers but if you had your eye on a specific home before that would have worked with a 30-year mortgage, you should check your 15-year mortgage again before you move forward. Often stretching out the payments over a longer time period will give you more choices because you can qualify for a bigger loan.
If your income is variable and unpredictable, payments on a 15-year mortgage may become too much to handle eventually. However, if you can afford the higher payments and you will be able to meet your other financial duties and goals at the same time, it is a great way to lock in a lower interest rate and enjoy paying off your mortgage much faster.
Whenever making these decisions, it is best not to stretch your finances too close to the limit and make sure you have some wiggle room in an emergency. Make sure your 15-year mortgage fits those goals before you jump into it.