Buying your first home can feel like you are navigating uncharted territory, which is a totally normal feeling. However, once you understand your loan options and the mortgage process you can chart your course for homeownership confidently.
Many first-time homebuyers are under the impression that they have to get a 30-year fixed-rate mortgage, which is simply not the case. While a 30-year fixed mortgage is a good option for many homebuyers, there are also other mortgage options at your disposal like a fixed mortgage with a shorter term or an adjustable-rate mortgage (ARM).
WHICH IS BETTER, AN ADJUSTABLE OR FIXED-RATE MORTGAGE?
Determining if an adjustable-rate mortgage is better than a fixed-rate mortgage, or vice-versa, is up to your financial situation, your home goals, and your living plans. A fixed-rate mortgage offers borrowers a predicable monthly payment while an ARM can offer flexibility if you plan to move.
Ultimately, the better mortgage option is the one that you feel comfortable with and are confident that you can repay. The best way to decide which option is better for you is to understand the difference between an ARM and fixed-rate mortgage. Using a fixed- vs. adjustable-rate mortgage calculator could help explain the monetary difference between the two.
FIXED-RATE MORTGAGE
One of the most common loan options is a fixed-rate mortgage which. A fixed-rate mortgage has an interest rate that will not change over the life of your loan and are usually offered in 30- and 15-year terms. If you ever find yourself wondering “whatever happened to predictability?” like the guy singing the Full House theme song, then a fixed-rate mortgage might be right up your alley.
Whether you opt for a 30-year or 15-year fixed-rate mortgage, the benefits are relatively the same. Pros and cons of a fixed-rate mortgage include:
PRO—Predictable monthly payments. Since the rate on a fixed-rate loan will not change, you can manage and maintain your monthly budget with relative ease because you can count on your mortgage payment to stay the same from month to month.
PRO—Peace of mind. It should come as no surprise that market rates fluctuate. With a fixed-rate mortgage, you don’t have to worry when mortgage rates rise because you will have locked in your specific rate for the life of your loan.
PRO—Multiple financing options. No two homebuyers are the same which is why PrimeLending offers a wide variety of fixed-rate mortgage options. Whether you need something with lower down payment requirements or an assistance program*, a fixed-rate home loan can help you find the financing you need to buy your dream home.
CON—Longer terms. Life can take you anywhere and sometimes that means moving. Whether you’re moving down the street or across the country, being locked into a mortgage with a longer term doesn’t always provide the flexibility you may be seeking of you don’t intend to stay in the house long term.
That said, if you DO plan to live in your home for the long haul, having a longer loan term could mean lower monthly payments so this might actually be a pro. Plus, if you choose a 15-year fixed mortgage rate, your term will be half as short as a 30-year fixed-rate mortgage.
ADJUSTABLE-RATE MORTGAGE
An adjustable-rate mortgage (ARM) is another option for homebuyers. ARMs have an interest rate that varies, or adjusts, over the life of the loan. An ARM works by beginning with the introductory period which usually spans several years. During this time, the rate on your mortgage will not change and is typically lower than the rate on a fixed mortgage
After the introductory period, the rate will change to reflect the market rate at the time. So, on a 5/6 ARM, a borrower would be locked into their introductory rate for five years after which the rate would change every six months. Some pros and cons for ARMs include:
PRO—Flexibility. One of the main benefits about an ARM is that they can allow more flexibility for homebuyers that may not be making this home their permanent home. Whether you get a 5/6, 15/6, or something in between, an ARM may be an option for you if you plan to move before your introductory period is over.
PRO—Lower rate, lower payment. During the introductory period of your ARM, your interest rate will be lower than that of a fixed-rate mortgage. In turn, you could expect lower monthly payments because the interest portion of your payment will not be as high.
PRO—Options, options, options. Much like a fixed mortgage, an ARM offers an array of loan types. You can get a conventional, jumbo, or government-backed adjustable-rate mortgage. Plus, ARMs from PrimeLending come in a variety of term lengths including 3/6, 5/6, 7/6, 10/6, and 15/6.
As you continue on your homeownership journey, be sure to consider how getting an ARM vs. fixed-rate mortgage would work with your home needs and financial future. If you are seeking guidance through the mortgage process it is important to reach out to a mortgage expert you can trust. Connect with your local PrimeLending loan professional today to get started.
*Certain restrictions apply. Not available in all areas. Please contact your PrimeLending loan officer for more details.
