Fixed or Adjustable Rate: Which Mortgage is Right for You?
Buying a home is a significant accomplishment in your life. It’s also important to choose the right type of mortgage for your unique financial needs. That’s why couples like Doug and Heather, University Credit Union members, decided to do some homework before buying a home and going with just any mortgage provider online or a broker.
While Heather wanted to get an adjustable rate mortgage to buy a house with lower payments now, her husband Doug wanted a home with a fixed rate mortgage which would provide them with predictable payments over the life of the loan.
Choosing a mortgage doesn’t have to be a complicated decision. Although interest rate is important, Doug and Heather took other factors into account, such as how long they planned to stay in their house and what kind of loan they wanted to meet their monthly budget. While there are many different types of loans out there, the good news is UCU offers both fixed-rate mortgages and adjustable-rate mortgages for you to choose from for your particular situation.
While you will likely be able to research even more loan options with UCU, your first decision is choosing whether you want a mortgage with an interest rate that never changes during the period of the loan, or one that starts low but varies over the loan period (either up or down).
Fixed-Rate Mortgages Offer Predictability.
If you are like Doug, then when it comes time for budgeting, you know exactly what payment you’ll get with a fixed-rate mortgage.
- Fixed Interest Rate: Fixed-rate mortgages offer an interest rate that will never change during the term of your mortgage. If you’re borrowing during times of low interest rates, this is a valuable perk because you’ll pay less money in interest.
- Predictable Payments: With a fixed-rate mortgage, your monthly total amount paid for principal and interest will not change. However, if your municipality increases taxes every year, as most do, you’ll see an increase in your monthly payment if you’re paying your taxes through your mortgage payment and not separately. Due to amortization, more of your payment will go toward interest in the first years of your mortgage. In the latter stages of your mortgage term, more of your monthly payment will go toward principal.
- No Surprises: Because your rate is fixed, it’s easier to figure out your monthly allocation for housing. But if you’re borrowing during a time of high interest rates, this mortgage’s payments might be less affordable than other options.
- Term: Another factor to consider with a fixed-rate mortgage is the term of the loan. Thirty years is the most popular option because it offers the lowest monthly payment. However, you’ll pay more for your home over the life of the mortgage compared to a 15-year or 20-year term, since you’re paying 10 or 15 additional years of interest.
Fixed-rate mortgages are best if…
- You want to know what you’re going to pay for your mortgage every month.
- You plan to live in the home for 10 years or more.
- You’re borrowing during a period of low interest rates and the first two points apply to you.
Adjustable-Rate Mortgages Offer Flexibility.
If you are like Heather, then an adjustable-rate mortgage (ARM) offers attractive features like larger loans with lower payments for some borrowers.
- Fluctuating Rate: The interest rate for these mortgages will adjust frequently over the life of the loan, depending on how the mortgage is structured, after a specific period when the rates is fixed, usually one, three or five years. In the early stages of the ARM, your interest rate will be lower than the lowest rates offered on a fixed mortgage. Depending on market conditions, your ARM can increase sharply or gradually, or it could decrease. It’s uncertain, which is why it’s important for you to determine that you can afford larger monthly payments if your mortgage adjusts upward.
- Larger Loan: Along with lower initial payments, you can also qualify for a larger loan because you’re not paying as much in interest at the start. If interest rates continue to decrease, you’ll enjoy lower mortgage payments and lower rates without refinancing your mortgage.
- Interest Rate Ceiling: There is a ceiling that caps your ARM’s rate increases, which varies by lender. Your interest rate will adjust based on activity of a particular index, such as interest rates on certificates or Treasury bills. Keep in mind that interest rates on ARMs can double within a few years.
Adjustable-rate mortgages work if…
- You want an initial rate that starts below current market rates for fixed mortgages.
- You plan to live in your house for approximately five years or fewer (or before the fixed-rate period ends).
- Interest rates are relatively low, and you they might go lower in the future.
Buying a home is certainly an exciting stage in life. So, if you are like Doug and Heather, make sure you select the right type of mortgage that works for you now and in the future. Make the right choice with the helpful assistance of a UCU mortgage professional.
Want to learn more? A UCU home loan can also reward you with an extra 1.00% APY* on your checking account balance up to $25,000. For next steps, please reach us at 800.UCU.4510. We can’t wait to meet you!