When it comes to financing a home, two of the most popular loan options are fixed-rate and adjustable-rate mortgages. Understanding the difference between these two types of loans is essential for making an informed decision about which one is right for you. A fixed-rate mortgage is a loan with an interest rate that remains the same throughout the life of the loan. This means that your monthly payments will stay the same, regardless of changes in the market.
This provides stability and peace of mind, but it also means that if interest rates are high when you apply for the loan, your payments may be higher than with an adjustable-rate mortgage (ARM). An ARM is a loan with an interest rate that can change over time. The initial rate is usually lower than a fixed-rate mortgage, but it can go up or down depending on market conditions. This means that your monthly payments may increase or decrease over time.
If you plan to own your home for only a few years and are confident that you can pay back the loan quickly, an ARM can help you save money in the short term. When interest rates fall, the interest rate on an ARM mortgage will decrease without the need to refinance the mortgage. However, if you own a home for 10 years and the interest rate increases over time, you could end up paying much more in total with an ARM than you would have paid if you had taken out a fixed-rate loan from the start. It's important to keep track of current mortgage rates before you apply for a loan to ensure that the one you choose fits your financial goals.
If you're looking for a loan for an investment property, such as a rental, lenders may also want to see evidence that the property can generate enough income to cover your mortgage payments. The decision to apply for an adjustable-rate or fixed-rate mortgage is an important decision that should not be taken lightly. Learn more about how fixed-rate mortgages compare to adjustable-rate mortgages, including the pros and cons of each.
