If you are going to take out a mortgage in the near future, then there are several different types that you should familiarize yourself with. By understanding the benefits and drawbacks of each type of mortgage, you can pick the option that is best for you financially. Here is a comparison of the two most common types of mortgages: fixed-rate and adjustable-rate mortgages.
What is a fixed-rate mortgage?
A fixed-rate mortgage locks you in for a single interest rate for a long period of time. It's common to take a FRM for 15 or 30 years, with a longer duration resulting in lower individual payments, but more money spent in the long run.
The idea is that your interest rate will be the exact same for the duration of the entire loan, meaning that you know exactly what you will expect. The loan is also fully amortizing, which means that every payment will be the exact same size. Your first payment will be the same amount as your second payment, which will also be the same as your last payment as long as you follow the payment schedule.
What are the benefits of a fixed-rate mortgage?
With an FRM, you will be able to plan your financial situation out decades in advance. You will know exactly how much your mortgage payment is going to be, which can make budgeting a much simpler process.
You won't need to worry about your interest rate increasing, which means that you won't need to increase spending on your home. In fact, you will probably end up spending relatively less in the future, since fixed-rate mortgages become a little less valuable over time due to inflation.
What is an adjustable-rate mortgage?
The other big option is to get an adjustable-rate mortgage, which has a variable interest rate. That interest rate can change depending on the market, but that really means that it will probably go up in the future. In general, an ARM is going to start with a low interest rate and increase to a higher interest rate as the economy changes.
This means that your actual interest rate could increase quite a bit from year to year.
What are the benefits of an adjustable-rate mortgage?
With an ARM, you will likely get a very low interest rate at the beginning. This can be very helpful if you want to save a bit of money now and expect to have a lot of extra money in the future, when the interest rate will increase.
You also have the opportunity to get an ARM, make your payments for several years, and then sell your home later. If you sell your home before a spike in the interest rate, then you can probably get a pretty good deal. However, if you wait too long and end up trying to sell after the interest rate increases, the value of your home will likely drop quite a bit.Share
14 March 2016
A few years ago when I decided to follow my dreams and open up my own restaurant, I realized that I was severely lacking working capital. I didn't have enough money to rent a space, buy equipment, or hire staff. Fortunately, through the power of lending, I was able to secure my future with great financing. However, a lot of people aren't as lucky. My blog is here to teach you more about different types of loans, so that you don't make the same mistakes other people do. You never know, this information could save you time, frustration, and even financing charges.