Are You Staying Put?
Your timeline will play into which type of mortgage is right for you. Fixed rate mortgages are what they sound like — mortgages in which the interest rates are fixed for the life of the loan. Adjustable rate mortgages (or ARMs), on the other hand, have interest rates that change over the life of the loan, affected by a host of potential factors, including time and federal rates. For example, you may have an ARM that has a fixed rate for the first five years, with annual rate adjustments for each year after that. If you have no plans to move in the next several years and interest rates are low, locking them in with a fixed rate mortgage will give you the most security. On the other hand, if you’re planning to sell the home within a few years, an ARM can potentially allow you to access even lower rates without worrying about the adjustment period.
What Is The Economic Forecast?
The benefit of an ARM is the potential for low rates; the downside is the level of uncertainty that comes along with them. In a poor economy, an ARM can end up helping you save in the long run if rates start falling below what you acquired the loan at. On the other hand, a sudden increase in interest rates can significantly affect your monthly costs. Keep in mind that currently, low interest rates have caused everyone in the real estate profession to hold their breaths for a possible fed rate increase, which can mean a fixed mortgage at these low rates may be a better chance for more security in the long run.
How Well-Versed Are You?
Mortgages can be incredibly complicated, which is why the Consumer Financial Protection Bureau exists. Recent changes instituted by the Bureau have helped make the lending process less opaque for borrowers — but that doesn’t mean there aren’t still plenty of things you as a borrower need to be aware of. Keep in mind that ARMs are far more complicated than fixed rate mortgages. With the latter, you have to stay on top of timelines and loan terms or be you can be caught off-guard by steep rate increases. If you are a first-time home buyer and new to the process, the intricacies of an ARM may cause too many unknown variables and hold the potential for issues that aren’t worth what seems like a discount. On the other hand, for experienced home buyers who are familiar with mortgage terminology and structures, an ARM can be a way to increase purchase power.
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