Fixed-Rate Mortgage vs. Adjustable Rate Mortgage

How do I know what’s right for me?

Thinking of buying a home, and wondering where to start? In order to figure out how much a home is going to cost you each month, it’s important to understand the different types of mortgage loans available.

Two of the most common types of mortgage loans are Fixed Rate Mortgages and Adjustable Rate Mortgages (ARMs).

• A Fixed Rate Mortgage maintains the same interest rate throughout the life of the loan. You can usually choose to pay back the loan in 15, 20, or 30 years (depending what you’d like your monthly payment to be). Fixed rates tend to start off higher than introductory ARM rates, but are described as being “safer,” because there’s no risk of the interest rate rising sharply.

• An Adjustable Rate Mortgage (ARM) has an interest rate that starts out lower at first, but changes after its introductory period, depending on the housing index rate. After the introductory period is over, the rate continues to adjust at set time intervals throughout the life of the loan. The low initial interest rate makes a home more affordable in the early years of repayment—but the borrower must be prepared to accept an increased mortgage payment if rates increase after the introductory period. If rates fall, the borrower will enjoy lower interest rates than what they started out with.

It’s important to consider the housing market as well as your current situation when deciding which type of mortgage is best for you. Do you think mortgage interest rates will rise in the near future? A fixed rate mortgage may save you from skyrocketing payments later down the line. Do you plan to sell the home in 5 years? An ARM may save you money with a low interest rate before they have a chance to adjust after the introductory period. The Credit Union offers both types of mortgages, and every home buying situation is unique! Give us a call at 408-524-4500 or come in to speak with any of our friendly Relationship Officers. We’re here to deliver you a better financial life, every step of the way!

Not sure whether you’re ready to buy a home? See our Should I Rent, or Should I Own article to see if it’s right for you!

Resources
http://www.homeloanlearningcenter.com/mortgagebasics/mortgagetypes.htm
http://www.nerdwallet.com/blog/finance/mortgage/faq/fixed-adjustable-rate/

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