Fixed Rate Mortgage: Predictability through a Conventional Loan

When you are seeking a conventional loan with straightforward terms and payments, a fixed-rate loan may be the right choice. With a fixed-rate mortgage, you can expect the interest rate and your monthly mortgage payment to remain the same for the full-term of the loan. This scenario is ideal for borrowers who desire predictability of payments for budget planning.

There are different options available for the fixed-rate mortgage, including 30-year, 20-year and 15-year. The term you choose impacts the interest you pay, the equity you earn and determines the amount of your monthly payment. The longer the term of the mortgage, the higher the interest rate, and the more interest you can expect to pay during the life of the loan. However, the benefit of a longer term is that the monthly payment will be more affordable.

On the other hand, going with a shorter repayment term, the sooner you will be able to pay off the mortgage and build valuable equity in your home, yet the higher your monthly payment will be.

A fixed-rate mortgage may be an ideal option if you:

• •Are concerned that interests rates will increase and you want the predictability of a fixed interest rate.
• •Want to be able to determine what your payment will be for years to come in order to plan out your budget.
• •Expect to own the home for many years.

Adjustable Rate Loans: Pay Less Up-Front for Your ARM Loan

Adjustable rate mortgages (ARM) offer a lower interest rate than fixed-rate loans for a specific payment period in the beginning, which means the initial monthly mortgage payments will be low. However, following the initial period, the ARM loan’s rate of interest will adjust to a fully-indexed rate, typically increasing the payments.

Adjustable rate loans are available for a 30-year term, but have different options regarding the length of time the lower initial interest rate will last before the adjustment. Options such as 10/1 ARM would provide the lower interest rate for 10 years before the rate adjusts to a fully-indexed rate.

While the lower initial payments are appealing, it is important to consider that the payments will likely increase significantly after the initial period, and you will need to be prepared to afford the higher monthly payments when the time comes. Also keep in mind that the interest rate adjustment will decrease accumulated equity and could possibly make it challenging to obtain a refinance on your loan in the future.

An adjustable rate loan may be ideal if you:

• •Have a plan in place to move to a different home before the end of the initial rate period.
• •Are certain your income will increase enough in the future to cover the increase of the mortgage interest rate.
• •Require a lower monthly payment than what you can expect from a fixed-rate mortgage.