Fixed Vs. Adjustable Rate Mortgages: What’s The Difference?

If you’re on the market for a new home, the biggest hurdle is likely to be how you’re going to pay for that home. Unless you’ve got cash to pay for the home front (and in which case, congratulations), you’re going to need to secure financing in the form of a mortgage. A mortgage is essentially a loan that covers the cost of your home. You’re responsible for paying back the loan plus interest over the course of years (typically 15 or 30). The concept of a mortgage is pretty simple. You borrow money from a lender to pay for your home and then pay them back the total you borrowed plus the interest you accrue over the life of the loan. But the types of mortgages available to you aren’t quite as simple. You have two main options when it comes to securing a mortgage: a fixed rate or an adjustable rate mortgage. But what’s the difference? What are the pros and cons of each? And which is the best choice for you and your finances? Fixed Rate Mortgages A fixed rate mortgage is a mortgage with an interest rate that stays same throughout the entire life of the loan. So, for example, if you secured a 30 year fixed mortgage with a 3.85% interest rate (which is a common rate in the USA as of July 2017), you would continue to pay that 3.85% over the entire 30 years of the loan - even if San Diego mortgage rates fluctuated. The benefit of a fixed rate mortgage loan is that you know exactly how much you’ll have to pay each month; the payment you’ll make on the loan will never change (your monthly payment may change based on rising property taxes or insurance, but the amount you pay towards your mortgage will stay constant throughout the life of the loan). Adjustable Rate Mortgages An adjustable rate mortgage, on the other hand, is a mortgage whose interest rate will fluctuate throughout the course of the loan. Typically, adjustable rate mortgages offer an initial fixed-rate period followed by adjustable rates at predetermined points throughout the rest of the life of the loan. The most common adjustable rate mortgage is the 5/1 ARM, which offers 5 years at an initial fixed rate followed by adjustments to the interest rate each year. The benefit of an adjustable rate mortgage is that the interest rate during the initial period is typically lower that the interest rate of a fixed rate mortgage, which means you’ll enjoy a lower monthly payment. Another benefit is that if interest rates fall during the life of your loan, your monthly payment will fall as well. But on the flip side of that coin, if interest rates rise, your monthly payment will rise right along with them. Interest rates are notoriously unpredictable, and if they rise sharply, you can find yourself faced with a much higher monthly payment than you anticipated. Adjustable rate mortgages do have protections in place to make sure your monthly payments don’t get out of control. ARMs come equipped with caps that limit how much your interest rates - and your payments - can go up over time. The most common ARM caps include an initial cap, which limits how much your interest rate can increase during the first adjustment; a periodic cap, which limits how much your interest rate can increase for all future adjustments following the initial adjustment; and a lifetime cap, which limits how much of interest rates can increase over the life of the loan. Which Is The Better Fit For You? There are pros and cons to fixed rate and adjustable rate mortgages and ultimately you’ll need to decide which is the better fit for you. Fixed rate mortgages are significantly more stable and you won’t find yourself with increasing monthly payments. Adjustable rate mortgages are more of a risk, but with that risk comes lower payments during the initial fixed period of the loan and the possibility for lower payments in the future if interest rates fall. Overall, a fixed rate mortgage is likely a better decision. When you can count on your monthly payment, you can save and budget accordingly… and not find yourself with rising bills you can’t pay. And with interest rates at a near all-time low, there’s never been a better time to lock in a rate for the next 15 to 30 years. For more information on current interest rates visit San Diego home loans officer Scott Shields.    Property Listings Reviews on Zillow 2936191 "We have known David Caracausa for over 2 decades. The marketing and eventual sale of our house was quick, efficient and painless. It only took about ... more "5.0/5.0 by coachjane122869426 "David is the consummate professional. We selected him as our realtor after interviewing other well regarded realtors in our market. He distinguished ... more "5.0/5.0 by meheister2435509 "David Caracausa was an outstanding personal representative for my recent home sale in North Wales, Pa. He was excellent in all areas from staging of ... more "5.0/5.0 by allan truant
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