When applying for a mortgage, you have many different choices. Interest rates are a big factor in deciding which loan is right for you. Fixed rate loans have the same interest rate for the entirety of the loan term, until it is refinanced. Adjustable Rate Mortgages (ARMs) have an initial interest rate, and after the introductory period is over, your interest rate will change, and your payment will most likely increase. Your rate can stay the same for months, a year, or a few years.
If you are conflicted between the two choices, here are some factors to help you decide:
- How frequently will the ARM adjust?
- What are the margins, caps, and indexes that the ARM is tied to?
- How long are you plan on staying in your home?
Adjustable Rate Loans can change as frequently as every month. If this type of situation would be to overwhelming for you, it is best to stick to the fixed rate loan. The unchanging house payments and stability makes budgeting much easier. First-time buyer shave an easier time understanding their loan terms when using a fixed rate mortgage, the language is a lot less complicated.
If the interest rates are up for the entire mortgage industry, an ARM would make more sense. You can get the lower interest rate to begin with and refinance when the rates are decreasing again. Fixed Rate loans can be expensive for some borrowers because there is no initial payment and rate break.
ARM’s frequently have lower rates at the beginning or your loan term than fixed rate mortgages, which can be very effective for borrowers who don’t plan on staying in one place for very long.
Even if you are planning on selling quickly, a good rule of thumb is to be sure you would be able to afford the loan if the rate and payments increase to the max rate, in case things don’t go according to plan.
When purchasing a new home, it is crucial that you evaluate all your options before deciding what type of San Diego mortgage is right for your family. Learn more about your mortgage options, by contacting our experienced loan officers at Bluefire Mortgage in Carlsbad, CA.