If you’re buying a house, your broker may encourage you to get a certain type of mortgage, but another person may tell you that this plan isn’t right for you. Rather to being perplexed and subsequently regretting your decisions, it is best to learn about the various types of mortgages so you can obtain a general notion of the mortgage you qualify for. You must understand the basics of both fixed and adjustable rate mortgages in order to make an informed decision. Your ability to pay in the future is crucial since it affects your mortgage costs.
Fixed Rate Mortgages
For the duration of the mortgage, the interest rate remains constant. It’s easier to manage your personal money now that you know how much your mortgage payment is going to be.
Pros of a Fixed Rate Mortgage
- Since the interest rate is fixed, a lower initial rate stays the same until the full term of the loan completes.
- You won’t have to worry about interest rate swings because you’ll have a fixed monthly payment for the duration of the loan.
- Allows you to be more proactive in your financial planning.
Cons of a Fixed Rate Mortgage
- The initial monthly payments might be higher unlike those of an adjustable rate mortgage.
- The plan is not flexible.
Adjustable Rate Mortgages
As the name implies, the interest rate and monthly payments fluctuate and often start cheaper than with a fixed rate mortgage. However, because the adjustment is based on a financial index, you must account for the possibility of rate and payment swings at least once or twice a year. For the duration of the loan, the principle and interest payments will be adjusted in response to changes in interest rates.
Pros of Adjustable Rate Mortgages
- Because the interest rate is lower, the initial sums of money are on the lower end of the scale.
- Because the initial interest rates are low, you may be able to qualify for a larger loan amount.
- The maximum amount of interest that can be paid on a loan is limited by interest rate restrictions.
- If interest rates fall, payments will fall as well.
Cons of Adjustable Rate Mortgages
- Because future monthly payments are not fixed, proactive planning is not possible.
- Lower interest rates and monthly payments are only available for a limited time and only apply during the adjustment period.
- When interest rates rise, your monthly payment will rise as well.
Although mortgages are dependent on a variety of factors, it is best to choose a fixed rate mortgage if you plan to stay in your house for a long time and want to budget your monthly spending.