There a few different types of mortgages a borrower can obtain. Understanding the differences and the pros and cons of these is important. A fixed-rate versus and adjustable-rate loan is one thing to research and understand before you agree to which loan type fits your situation the best. If you want to discuss with an experienced Loan Officer for a loan in Bonney Lake, Graham, Sumner, Spanaway, Tacoma, or the US call the Northwest Mortgage Team today at 253-840-5600!
What is the difference between a Fixed Vs Adjustable Mortgage:
With a fixed rate mortgage, the rate you choose is fixed for the entire term of the loan for example a 30 Year Fixed mortgage the interest rate can never change. With an adjustable rate mortgage, the rate can adjust depending on the adjustable rate product you choose. Usually these products are fixed for 1 to 7 years then can adjust using a rate index like a libor or treasury rate plus a margin. Normally they have a cap on how high the rate can go and they won’t adjust the lifetime cap.
Pros of an Adjustable Rate
- A lower payment for the initial term of the Loan
- Less interest cost over the initial Term
- Most people don’t keep the same mortgage or home for more than 6 to 7 years.
- Works better for borrowers that know they may be moving in a few years or upgrading their home in a few years.
Pros of an Fixed Rate
- Principal and Interest portion of payment remains the same for the entire loan term.
- Better for people on fixed income that need payment predictability.
- If fixed rates are low makes sense to take a lower fixed rate that can’t change
- If you plan to keep your house long term a fixed rate makes more sense.
Cons of an Adjustable Rate
- The rate can adjust up.
- If you keep your house long term the payment can increase after the initial fixed rate period
- You may not be able to refinance if values drop so don’t count on that as a for sure exit strategy.
Cons of a Fixed Rate
- Paying a higher interest rate for the first few years
- Paying a higher rate when you know you may move in the next few years.
- Higher initial Payment
Examples of Adjustable Rate mortgages:
3/1 Arm – Fixed rate for first 3 years then will adjust once a year afterward
5/1 Arm – Fixed rate for first 5 years then will adjust once a year afterward
These are a couple examples of how an Adjustable rate mortgage can work.
What should you do next to see if a Fixed Vs Adjustable Mortgage is what you want to compare:
If you want to explore more options on a fixed vs adjustable mortgage then give one of our experienced Loan Officers in Bonney Lake, Graham, Sumner, Spanaway, Tacoma, or the US call the Northwest Mortgage Team today at 253-840-5600!