Adjustable vs. Fixed Rate Mortgage
Making the right choice between a fixed and an adjustable rate mortgage depends on numerous factors, including your actual financial situation, the purpose you want to use the loan for and several other important factors as well. In what follows, we would like to explain how the two types of mortgages work so that you can pick the type that works best for you.
Adjustable Rate Mortgages
This type of loan comes with interests calculated following the changes, drops and hikes in the base rate. Theoretically, the lenders can set their interests rates as high or as low as they want, but practically the rates are largely defined and limited by the competition by other lenders. Typically there is a 2% cap the first time it adjusts and then up to 5% over the start rate over the life of the loan. However, some can go as high as the life of the loan on the very first change, so it’s important to realize that you may be saving money in the short term, but be aware of the long term.
As you see, variable rate mortgages are more volatile, their main advantage being that within certain favorable economic conditions, interest rates may drop significantly, allowing borrowers to save money.
Fixed Rate Mortgages
If you decide to take out this type of mortgage loan, one of the major benefits will be that you will know exactly how much you will have to pay each month for the life of the loan. Fixed rates are not affected by changes in base rates, but this kind of stability comes for a price: fixed rate mortgages are typically 1%-1.5% higher than an ARM (adjustable rate mortgage).
Should You Go for the Fixed Rate?
When base rates are low, choosing an adjustable rate mortgage may be a good idea. However, this choice comes with certain risks – when rates go up, you may end up paying back much more than you would have with a fixed interest rate.
Fixed rates work best for people who do not have financial resources to finance the risks of adjustable rates and for those who are looking for stability and security. If you are convinced that your home is indeed the dream house you have always been looking for and you are not planning to sell it any time soon, a fixed rate would probably work best for you.
However, the mortgage market is experiencing a certain shift towards variable rates. More and more forecasts say that base rates will keep rising and flowing in the following years, increasing and decreasing the price of variable mortgages in a continuous ebb and flow. If you are planning to sell your property sometime soon or you have the kind of financial back-up that can take you through periods when rates rise, in hope that they will start dropping again soon, variable rate mortgages may work best for you.
If you are looking for more details about the type of mortgage that would work best for you or you are looking for help to be able to see clearly the outcomes of your possible mortgage options contact Maureen Martin. The expert is among the most reliable and most appreciated mortgage originators in San Diego, CA, a specialist who knows all the ins and outs of the mortgage system.