If you’re in the market for a new home, then it’s important to learn as much as you can about the different types of mortgages and how your mortgage can affect your finances in the long run. The differences between a fixed-rate mortgage and an adjustable-rate mortgage can make a huge impact on your financial future.
Before you sign any mortgage agreement, take the time to learn the difference between fixed-rate and adjustable-rate mortgages. Choosing the wrong type of mortgage can result in expensive payments that you cannot afford. This is exactly what happened during the 2008 housing crisis! Many homeowners financed their homes and investment properties with adjustable-rate mortgages without fully understanding the consequences of the adjustable rate.
What is the Difference Between Fixed-Rate and Adjustable-Rate Mortgage?
Fixed-rate mortgages are the most common type of mortgages. Fixed-rate loans have the same interest rate for the entire repayment term. Since your interest rate never changes, your monthly payment will stay consistent month after month and year after year. Fixed-rate mortgages are the best option if you are on a fixed income because they make it very easy to budget and plan for the future. If you want your mortgage to stay the same even when interest rates fluctuate, this is the mortgage for you.
Choose a fixed rate loan if you plan to live in the home for a long time or if you are on a fixed income. Fixed-rate loans make it very easy to budget and plan for the future because your housing costs are not likely to change (unless, of course, you take out a second mortgage or pay off the loan early).
Adjustable-rate mortgages (ARM) have an interest rate that “adjusts,” or changes, from time to time. Normally, the interest rate will be fixed for a specified number of years, and then adjust every year thereafter. If you’re offered a 5/1 ARM Loan, this means that your interest rate will be fixed for 5 years, and then adjust every year after the fixed period.
Adjustable rate mortgages are highly unpredictable because you never know how the rate will adjust. It’s best to use this type of loan only if you plan to live in the home for a few years. Don’t choose this loan if you plan to live in the home for 30 years!
It’s also important to note that ARM loans are cited as one of the leading causes of the 2008 housing crisis. As interest rates were adjusted, many people found that they could no longer afford their new monthly ARM payment. This led to a high number of foreclosures.
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