Of all the decisions that are involved in buying a home, one of the most important ones is which type of mortgage rate will serve the homebuyer best for the life of their home loan. There are a few different types of mortgage rates that one can choose from.
What Is A Mortgage Rate?
Those who are in the market to buy a new home will quickly find that there are a wide variety of mortgages on offer. Two of the most common mortgage types are fixed rate mortgages and adjustable rate mortgages.
Fixed Mortgage Rate
A fixed rate mortgage uses the same interest rate across the life of the loan. This means that the borrower’s monthly mortgage payment will remain the same year after year.
Although the breakdown of principal and interest that is paid each month will vary, the total payment stays the same. In the early years of such a mortgage, the payments are primarily composed of interest.
A fixed mortgage is typically offered in terms of 15, 20 or 30 years. The 30-year fixed rate mortgage is one of the most common loans Americans use to purchase houses. It is a conservative option for long-term or cautious borrowers who want to be sure they will be able to make every payment on their loan.
Benefits Of A Fixed Rate
The biggest benefit of a fixed rate mortgage is the fact that the monthly principal and interest payments do not change. This gives borrowers predictability so they can budget their expenses precisely each month. However, borrowers are always free to pay more than their minimum if they wish to pay the home off faster.
For a borrower who plans to stay in their home for at least 10 years, the stability that comes from a fixed rate mortgage makes it an attractive proposition. This type of loan is often the choice that offers borrowers the lowest monthly payment, but the trade-off for this low payment is a higher overall cost.
Cons Of A Fixed Rate
Borrowers generally end up paying more interest on longer-term fixed rate loans, and it will take longer to build equity in the home. Another drawback is that interest rates are often higher on fixed rate mortgages than they are on adjustable rate mortgages.
In addition, when interest rates are high, it may be more difficult to qualify for a loan because the payments will be less affordable.
Adjustable Mortgage Rates
An adjustable rate mortgage is a type of home loan that has fluctuating interest rates that rise or fall according to current market conditions.
Many adjustable rate mortgage products begin with a fixed interest rate during the first few years before changing over to a variable one for the rest of the term. The length of the fixed rate period can vary, running anywhere from one month to 10 years; those with shorter adjustment periods tend to offer lower initial interest rates.
Once the initial term has ended, the loan resets and a new interest rate is used that is based on current market rates. This rate will remain the same until the next reset, which might be the following year.
Some adjustable rate mortgages place a cap on how much the monthly mortgage rate or interest rate can rise to protect borrowers against significant fluctuations.
This type of loan is a good choice for borrowers who are comfortable taking on a certain level of risk. Those who do not plan to stay in their home for longer than a few years can see significant savings on interest payments by taking this route.
Benefits Of An Adjustable Rate
With an adjustable rate mortgage, many homeowners enjoy a lower fixed rate during the first few years of the loan. In addition, they save a significant amount of money on their interest payments.
Moreover, their low initial payments often allow a borrower to qualify for a larger loan; during times of falling interest rates, borrowers can take advantage of lower rates – and, by extension, lower payments – without needing to refinance their mortgage.
Cons Of An Adjustable Rate
However, should the adjustable rate rise too much, borrowers could find their home becoming unaffordable and even end up defaulting on their loan. In addition, if the value of the home drops significantly within a few years, it can be more difficult to refinance or sell the home before the loan resets.
Talk With The Pros On Mortgage Rates
Choosing the right type of home loan for you involves assessing a variety of personal factors against the current economic environment. To find out more about which type of mortgage rate is best in your situation, talk with the pros on mortgage rates at My Lending Pal. Our team can review your options with you and help you make an informed decision about the best way to finance your new home.