Which Mortgage Is Best For You?
Fixed Rate or Adjustable Rate
Fixed Rate Mortgage, Adjustable Rate Mortgage or even a Mixed Hybrid
Your mortgage will include a fixed or adjustable rate or a combination of the two.
Fixed Rate Mortgage
The fixed rate is a fixed percentage of interest to pay on the loan. For example, if you borrow $100,000 at a fixed rate of 6%, you will repay 6% interest throughout the life of the loan.
Adjustable Rate Mortgage
An adjustable rate mortgage (ARM) is a mortgage with an adjustable interest rate. This interest rate changes over time. You may initially purchase a mortgage with an interest rate of 6.5%, but if the interest rate adjusts with the financial market, then the interest rate will go up or down. Sometimes you could pay 7% and other times you could pay 5.9%.
Terms of Adjustable Rates Loans
The terms of the loan will spell out what the minimum and maximum interest rates are that you must pay and how often the lender can adjust the rate. For example, the lender may be able to raise the interest rate a fixed number of times per year.
The "Mixed Hybrid Mortgage" has a fixed rate component and an adjustable rate component. You will have a fixed rate for a number of years; typically 3, 5, 7 or 10. After the period of the fixed rate expires then your mortgage rate will adjust according to the terms of the Adjustable Mortgage part of the loan.
Choosing the Right Mortgage Program for You
Choosing the right mortgage program for you is dependent on your tolerance for risk, how long you think you will be in the home and the interest rates difference between the fixed rate mortgage and adjustable rate mortgages at the time.
Low Tolerance for Risk
If you don't want to worry about the unknown of how high the interest rate will get when it adjusts then get a fixed rate mortgage. You will know what your payment will be every single month until you pay off your mortgage. (Note: Interest rates can also adjust down).
How Long Will You Be in the Home?
Why get a higher 30 year fixed interest rate when you know you will only be in the home for 3 years and you can get get a hybrid fixed-adjustable mortgage that will be fixed for 5 years with a lower rate? You will pay the lower rate for 3 years then sell the property and not have to worry about the adjustment period at all. There are hybrid fixed-adjustable mortgages that are fixed for 3 years, 5 years, 7 years and 10 years. I always suggest getting the fixed term that is longer then you expected stay just to give you some buffer room.
Difference Between Fixed Interest Rate and Adjustable Interest Rate
At the same time, if there is only a little difference in the fixed interest rate and the hybrid fixed-adjustable rate then it may make sense just to bite the bullet and get the fixed interest loan for the security should you end up staying in the house longer than expected.
When you meet with your lender they will be able to show the actual rates on each program and how each will effect your bottom line.