Fixed or Adjustable: Which Mortgage to Choose?

Sep 25, 2018 8:30:00 AM

Ready to buy a house? Congratulations! This is one of the most important purchases you’ll ever make – so it’s no surprise that it can also be one of the most complicated. There are a huge amount of decisions to consider; from the basics like location and size, all the way up to more in-depth considerations about how you’re going to balance initial costs with the predicted price of repairs in the future.

One key decision when buying a house is what kind of mortgage you want. There are two choices – fixed rate, or adjustable rate. To help you choose which mortgage is the best for you, we’ve compiled a quick guide to the differences between fixed and adjustable rate mortgages.

What Exactly Is an Interest Rate?

To understand the difference between a fixed rate and an adjustable rate mortgage, the first thing to understand is precisely what rate we’re talking about. In this case, it’s an interest rate. When you take out a loan to purchase your home, you will need to pay back a certain amount of money every month, otherwise known as a mortgage payment.

Of course, like all loans, the money you’ve borrowed will be accruing interest; and you’ll need to pay this back to the bank alongside paying back the balance of the initial loan. The higher your interest rate, the more money total you’ll end up spending on your home. Therefore, choosing the right mortgage can help you spend your money as wisely as possible.

Fixed Rate Mortgage

A fixed rate mortgage means that the interest rate you get at the start of your home loan is the rate you’ll have for the entire life of the loan, and that all your monthly payments will be the same. If the federal interest rate is 4.75% today for a 30-year fixed loan, for example, you might be paying $1,500 on your home mortgage every month – and that’s what you’ll pay next month, the month after that, and 25 years from now assuming you don’t refinance and change your loan terms.

The benefits of a fixed rate mortgage are stability and security. Federal interest rates can increase with time or even shift quite unexpectedly, but with a fixed rate mortgage, you’re protected from unpredictable market conditions.

A young and growing family, for example, might appreciate having a fixed rate mortgage so that even if new expenses arise such as school fees or putting in a second bedroom for baby number two, you’ll always make the same mortgage payment every month. Plus, if economic conditions change and the federal government lowers the national interest rate, you might be able to refinance your initial loan and change to a new rate with lower monthly payments at a later date.

Five Reasons to Choose a Fixed Rate Mortgage:

1. You’re purchasing property for your family to ‘grow into’.
2. You’re not planning a major career change or geographical move in the next 10 to 15 years.
3. You would prefer to not have to re-haul your household budget regularly .
4. You have enough savings to cover monthly payments even if you lose your job or encounter an unexpected expense .
5. Generally speaking, you see yourself in the property for the long term.

Adjustable Rate Mortgage

An adjustable rate mortgage offers a lower starting interest rate than what’s available for a comparable fixed rate loan. This means lower payments for the first term of the loan, which is normally five, seven or 10 years. However, after that period, your interest rate will fluctuate based on what’s happening in the housing market.

The advantage to an adjustable rate loan is less cost at the start, but for many buyers, the uncertainty of shifting monthly payments isn’t worth the initial cost reduction. Plus, if the federal government makes a big adjustment to interest rates, it could mean skyrocketing mortgage payments later on. Then again, if you’re not planning to stay in the property for the long term, an adjustable rate mortgage could make sense.

Five Reasons to Choose an Adjustable Rate Mortgage:

1. You’re purchasing property primarily as an investment, rather than a long-term home.
2. You’re a new graduate entering a stable, high-paying field such as medicine or law.
3. You don’t mind tweaking your household budget to accommodate shifting monthly expenses.
4. You have a trust or inheritance coming in the next few years.
5. You’re planning to sell this property within the next seven years .

When choosing a mortgage, the most important factor to consider is guidance from a trusted financial advisor or loan officer. Working with an expert, you can evaluate your family, career and financial situation to determine which type of mortgage is right for you – and make your dreams of owning a home a reality.

You can set up an appointment with an HUECU home loan expert to go over your home buying needs.

Tags: Home Buying, Home loans, Mortgages, Personal Finance