Adjustable-rate vs. Fixed-rate Mortgages
If you are thinking about purchasing a new home, you might not be in a position to purchase a home with cash alone. Fortunately, you do not need to save up hundreds of thousands of dollars to qualify for a house. There are plenty of loan options available, but every buyer is in a different situation.
It is important to think about the benefits and drawbacks of different loan options, allowing you to decide which one is best for your needs. What do you need to know about an adjustable-rate mortgage vs. fixed-rate mortgage, and how can you decide which option is best for your needs? Look at a few key points below, and reach out to an expert who can point you in the right direction.
What is an adjustable-rate mortgage?
If you decide to go with an adjustable-rate mortgage, you are getting a mortgage with an interest rate that can change over time. Interest rates for home loans can vary based on a variety of factors, but one of the most important factors is the rate set by index which is influenced by the Federal Reserve. If the Federal Reserve decides to raise interest rates, it will be more expensive for banks to borrow money. Banks will pass on those costs to borrowers, including those who are interested in a home. Therefore, if you need to take out a home loan for a house, and the Federal Reserve has recently raised interest rates, then the interest rates for home loans will go up as well.
If you get an adjustable-rate mortgage, this means that the rate on your mortgage will change as interest rates in the market change. For example, you may take out a home loan today for approximately 4%. But, two years from now, the interest rate on your home loan could be 6%. This means that you will have to pay more money to the bank every month if you do not want to foreclose on your house.
Before obtaining an ARM loan:
- Educate yourself on which Index the ARM loan is tied to and the history of that index (SOFR, CMT, etc.),
- What the fixed Margin is on the ARM loan (interest rate is determinated by Index + Margin), and
- What are the adjustment CAPS and lifetime CAP of the loan (how high can it go each time it adjusts and how high can it go in total)
Even though there are some situations where an adjustable-rate mortgage might be a good idea, it is important for you to understand exactly how much interest rates can change over the life of your home loan. It is entirely possible that interest rates could go down, which means that you might save money, but it is also true that interest rates might go up, which can cost you more money. You need to keep this in mind as you think about which mortgage option is right for your needs.
What is a fixed-rate mortgage?
If the interest rate on an adjustable-rate mortgage can change, then the interest rate on a fixed-rate mortgage will be the same. This means that no matter what happens to interest rates in the foreseeable future, the interest rate on your mortgage will be the same.
If you want the certainty that you will pay the same amount of money every month for the life of the mortgage, then a fixed-rate mortgage is a better option for you. For example, you may take out a home loan today with a 5% interest rate. If you continue to pay that mortgage down regularly every month, the interest rate will not change. This means that even if you get promoted at your job and you start to make more money, you will still owe the same amount of money every month until the mortgage is paid off.
Furthermore, even if the Federal Reserve decides to raise interest rates down the road, the amount of money you owe the bank will stay the same. If you do not want to risk the chance of your mortgage going up in the future, then you might be more interested in a fixed-rate mortgage.
What type of loan should I choose?
So, how do you decide what type of loan is best for your needs? There are several factors to consider. Some of the biggest examples of the things that you need to think about include:
The Current Market
You need to think about what the market looks like right now. It is just about impossible to predict what the Federal Reserve is going to do with interest rates in the future, but it is important to take a look at historical interest rates. For example, interest rates just came offthe historic lows of 2020 and 2021As a result of inflation and other economic factorsinterest rates are going up in 2022 to the highest levels and at the fastest pace in over a decade, which means that the interest rate on an adjustable-rate mortgage could go up as well.
On the other hand, if interest rates are very high right now and have topped off, then the Federal Reserve might decide to lower interest rates in the future. This means that an adjustable rate mortgage could drop in the future. If interest rates are already very low, you may be better off with a fixed-rate mortgage because you think that mortgage rates are going to go up in the future. One popular adjustable-rate mortgage right now is the 6 Month SOFR ARM loan.
The Time You are in the House
You also need to think about the amount of time that you are going to spend in the house. If you believe that you are going to sell the house in the near future, then you might not care about what interest rates are going to do down the road. It is highly unlikely for interest rates to change significantly in a month or two, so if you plan on flipping the house, you may not care about an adjustable rate mortgage going up in a few years.
The Parameters of the Loan
If you are thinking about an adjustable-rate mortgage, you also need to think about the parameters of the home loan. What this means is that you need to figure out how quickly the interest rate can change, how much it can change, and the limit to which it can change. For example, you may be able to protect yourself if you get an adjustable-rate mortgage that cannot change any more than one percentage point every adjustment period.
There is also a chance that your adjustable-rate mortgage might not be able to go up or down by any more than 5%. Finally, see if there is a condition in the contract that states that the loan cannot change at all within the first six months or so. These could be ways for you to protect yourself if you decide to go with an adjustable-rate mortgage.
Your Future Income
You should also think about your future income. For instance, if you believe that your income is going to go up significantly in the future, then you may be okay with an adjustable rate mortgage going up if it saves you money today. It is not unusual for an adjustable-rate mortgage to begin slightly lower than a comparable fixed-rate mortgage at the same time. You might be able to save more money upfront.
Keep in mind that you also have the potential to refinance your home. If you decide to go with an adjustable-rate mortgage, and interest rates go up significantly, you might be able to refinance your home loan to save a significant amount of money at the same time, you need to take a look at the conditions under which you would be allowed to refinance. In a lot of situations, banks will not let you refinance your home loan until you have a certain amount of equity in the home. Be sure to talk to your lender about this carefully.
These are a few of the most important factors you need to think about if you are interested in getting a home loan. These are only two broad categories of home loans, and you need to think carefully about which one is right for your needs. The right home loan for one person is not necessarily going to be the right home loan for someone else. That is why it is helpful to reach out to a professional who can help you compare the benefits and drawbacks of each option before you make a decision.
Clearly, there are a lot of options available, and you need to consider your financial situation carefully. You need to think about what your financial situation will look like, not only today but also in the future. That way, you can compare the benefits and drawbacks of each option to make a decision.
If you are looking for the best home loans on the market today, you need to reach out to Griffin Funding. We have a tremendous amount of experience working with buyers in all situations, and we can help you find the right home loan to meet your needs. You might even be interested jumbo loans or Non-QM loans, which are right for people in certain situations. If you would like to learn more about how we can help you, contact us today to speak to a member of our team. We are always available to assist you, and we can help you find the house of your dreams at a price you can afford.