You’ve imagined a house with a big back yard. You’ve dreamed of a two-car garage. You may have pictured the house you’d buy one day, but how do you make that dream a reality? With a mortgage! Now which one do you choose?
Fixed or Adjustable? That is the question. The first thing to consider is whether a fixed-rate or adjustable-rate mortgage is for you. So what’s the difference? A fixed-rate mortgage will always have the same interest rate. This means that month after month, you’ll always have the same monthly payment.
Adjustable-rate mortgage loans (ARMs), just as the name suggests, have an interest rate that adjusts over time. Sometimes, these loans will start with a fixed rate for a certain period of time, and then adjust year-to-year. For that reason, they can also be referred to as “hybrid.” Common examples of hybrid loans are the 3/1 ARM and the 5/1 ARM, meaning the rate is fixed for the first three or five years and then gets adjusted year-to-year.
So, which one is better? That depends on what you’re looking for. Both loan types have some positives and some negatives. A fixed-rate loan is a sure thing; you know right up front what you’ll be paying because the interest rate stays consistent for the life of the loan. The most common fixed-rate loan is a 30-year, which locks in your monthly payment for that time period. This is the ideal mortgage type for homeowners who plan on staying put for some time.
ARMs are less predictable as they adjust at predetermined intervals, and you never know what the rate will change to, only when it will change, but they usually start with a lower interest rate than a fixed-rate mortgage. ARM loans have interest rate caps that limit the amount the rate can change month-to-month and for the life of the loan. These mortgages are best suited for homeowners who plan to stay for only a few years.
Go big or go home. Jumbo loans are an option for high-priced or luxury homes. These are appropriate for loans that exceed the conforming mortgage amount of $417,000. Jumbo loans are ideal for people with a lower debt-to-income ratio, a high credit score, and who can afford a larger down payment.
Do you think you’re special? Well, you might be. There are some other categories that open the door for other mortgage types. FHA loans are government insured and are ideal for first-time homebuyers. These loans require minimal down payments and are flexible with FICO scores.
VA loans are government loans available to veterans who have served in the U.S. Armed Services. Some advantages to these loans are that, in most cases, they don’t require a down payment, and parameters for attaining them are less stringent. The loan is guaranteed by the Department of Veteran Affairs, but funded by outside lenders.
It’s easier than it seems. If you do the research ahead of time to find the right mortgage for you, this whole process isn’t as scary as it seems. There are plenty of solutions to choose from and you don’t have to do it alone. With the right guidance from a knowledgeable mortgage lender, you’ll be in your dream home in no time.