When it comes to mortgages, fixed rate mortgages and adjustable rate mortgages are the two most used types. There isn’t a universal type used by all companies that satisfies either one as they can come in a large variety. That is why it is important to shop around and find out which one will best fit your needs. There is a lot of homework to do, so we will cover the basics and let you know what the market looks like for both right now.
Fixed Rate Mortgages
Fixed rate mortgages charge an interest rate that is predetermined by the lender, and that rate will carry on throughout the entire length of the loan. The payment is the same each and every month for the mortgage, so it is much easier to fit into a budget when trying to calculate one. Even though those payments all remain the same, the amount that is paid towards the principal balance and the interest changes over the course of the mortgage.
For instance, if you were to have a $100,000 mortgage with an interest rate of 6% over a 30-year span, the payments would be the same, but the amount paid to interest and principal looks very different. Each month, the payment would be $599.55, with $99.55 going towards principal in the first month. Each month, $0.50 more would go towards the principal as the interest is paid off in the initial years of the loan.
The most appealing part of a fixed rate mortgage is that any unexpected and large increases in interest rates will be rendered useless against these types of mortgages. The monthly payment will never change once agreed upon initially. The least appealing part is that they can be hard to qualify for if interest rates are high due to higher monthly payments.
The three most common fixed rate mortgages are 15, 20 and 30 years long. The amount of interest that is paid on these mortgages will vary depending on the length. The 30-year mortgage is the most frequently used thanks to the monthly payments being much lower. However, since the first decade is spent paying off the interest, there is a tradeoff. Shorter term mortgages have a lower interest rate, so it’s important to decide between the two.
Adjustable Rate Mortgages
Interest rates for adjustable rate mortgages vary greatly over the loan. The initial interest rate is set below that of the market rate on a fixed rate loan. The rate then rises as the loan goes on. If the length of the loan is long enough, then the adjustable rate mortgage interest rate will be higher than that of a fixed rate.
These types of mortgages have a set amount of time in which the interest remains constant from the beginning. The increase of interest and frequency is predetermined and can vary greatly. This can go anywhere from a month to a decade. If you have a lower interest rate, the chances are that it won’t last as long.
Current Market
If you look at current mortgage rates, you will find that the adjustable rate mortgages have a much lower initial interest rate, but have risen just as quickly as a fixed rate in the last few months.
The 30-year fixed rate mortgages are currently holding at just over 4.5%, while adjustable rates are sitting around 3.5%. More new buyers are taking chances on the adjustable rate mortgages these days as they are easier to qualify for, in hopes of locking in a low initial interest rate before they rise again.
It’s important to figure into your budget which one is going to be the best. Over the long term, there really isn’t going to be an enormous difference between the two, but it all comes down to what you anticipate being able to afford over the next decade. Look into both of them with bankers, and find which one will be the best.
