First-Time Homebuyer’s Guide: Part 7

Fixed vs. ARM

After deciding whether the lowest rate, lowest monthly payment or shortest term loan is best for you in Part 6, now it’s time to select the type of mortgage that best fits your needs.

There are two main types of loans: Fixed and adjustable rate mortgages (ARM). As their names imply, fixed rate mortgages, a popular long-term option, involve the same interest rate for the entire term. ARMs, on the other hand, have a set rate initially that is subject to change after a predetermined amount of time, typically five, seven or ten years.

Which one should you consider? It depends on your circumstances.

The 30-year fixed rate mortgage has long been popular and a large majority of borrowers elect this option due to its long-term nature, affordable monthly payments and rates that will never change throughout the life of the loan. Homeowners can be assured that when it comes to family finances, mortgage payments with a 30-year or 15-year fixed loan will not be susceptible to unpredictable changes that could increase or decrease the monthly amount owed. If you’re purchasing a home and you plan on living in it for the rest of your life or an extended amount of time, a 30-year fixed rate mortgage (or 15-year fixed rate in the event you are capable and interested in paying it off in a shorter timeframe) could very well be for you. You can lock in a low rate and know exactly what you’ll owe each month—no changes and no surprises, ever.

On the other hand, if you’re purchasing a condo you may outgrow sooner than later or you don’t expect to be in a property long-term, you could consider an ARM. That’s because ARMs typically offer rates lower than what you can obtain with a fixed rate mortgage. For someone who only plans to own a home ten years or less, lower rates and lower monthly payments can be enjoyed with an ARM. That’s due to some risk being incurred given the unpredictable movement of interest rates and the fact your rate could change beyond the initial period.  An index commonly used for ARMs is the London Interbank Offering Rate (LIBOR)—depending on where it is when your rate is eligible for an adjustment, it could result in an increase or decrease of your monthly payments.

In next week’s First-Time Homebuyer’s Guide…

Part 8: Find your perfect mortgage expert

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