Off the bat, it’s clear that the difference between fixed-rate and adjustable-rate mortgages is that one rate will stay the same while the other will vary.
While that’s simple enough, the real-world effects of each mortgage option will vary. Read on to learn more about the benefits of each program.
Fixed-rate mortgage loan
As a borrower, you can lock in an interest rate for the life of the loan. With today’s low rates, that’s a huge advantage. Homeowners can enjoy low financing costs thanks to the historically low rates.
Mortgage holders will notice that the amount of interest they pay will change with every payment. Yet, the total mortgage payment will stay the same for the life of the loan.
A predictable monthly mortgage is essential for budget planning. Homeowners can count on their mortgage bill not changing month to month for better financial planning.
There are also no surprise increases to the bill, which allows families to save money. If interest rates take a turn, homeowners with a fixed-rate loan will not need to worry about any impacts.
Finally, the total amount of interest paid for the financed amount will vary based on the length of loan, which is typically 15 or 30 years.
When borrowers take on an adjustable-rate loan, they will experience more fluid payments.
In many cases, adjustable-rate loans will begin at a lower interest rate, even lower than those offered by a fixed-rate loan. The rate will stay in place for a period between several months and years. Once the initial rate ends, the rate changes and so does the bill.
Borrowers benefit from learning how high the interest rate can go. Other key questions to ask about an adjustable-rate loan include: How soon can the rate move? How often will it move? Are there any limits to how high the rate will go?
Depending on how long the buyer plans on staying in the home, an adjustable-rate mortgage could be the appropriate route for them to take. Or, a borrower could plan to refinance just in time for changes to the initial interest rate.
After the initial fixed-rate period on an adjustable-rate mortgage, your interest rate may increase annually according to the market index. If the interest rate resets, your monthly mortgage payment may increase.