Your home is a major investment that requires a huge amount of money. If you are planning on buying one soon, you will likely finance your purchase by taking out a mortgage. Your mortgage lender charges interest, and the interest rate depends on the type of mortgage you pick. You can choose between an adjustable-rate mortgage and a fixed-rate mortgage.
What Are Adjustable-Rate Mortgages?
Adjustable-rate mortgages (ARMs) are a type of loan that requires you to pay back the money you borrowed over 30 years. During the first 7-10 years, you will get a low introductory interest rate that will stay the same for a certain period. However, this interest rate will go up or down based on an index after the fixed-rate period ends. In other words, they are lower than FRMs, at least for several years.
What Are Fixed-Rate Mortgages?
Fixed-rate mortgages (FRMs) are the most popular type of home financing option since they are the most predictable type of loan. Unlike ARMs that have varying interest rates, FRMs have the same interest rate throughout the life of your loan. This means that your monthly payments won’t change. However, they have a higher interest rate because lenders have to predict these rates over time.
What Are the Differences Between ARMs and FRMs?
ARMs and FRMs are distinct in many ways. Besides interest rates, here are some of their differences:
Rate Caps
ARMs have different kinds of caps that control the interest rate in a certain period and over the lifetime of your loan. These are the initial adjustment cap, subsequent adjustment cap, and lifetime adjustment cap.
An initial cap is a maximum percentage the interest rate can go up or down in a specific period after the fixed-rate period ends. In contrast, a subsequent cap dictates how much the interest rate can increase from one adjustment period to the next. On the other hand, a lifetime cap says how much the interest rate can increase or decrease from the introductory rate over the lifetime of the loan.
Ease of Qualification
When applying, mortgage companies look at your debt-to-income (DTI) ratio, which refers to how much income you have versus how much you spend monthly. You may have an easier time getting approved for an ARM than an FRM if you have a high DTI ratio.
Which Type of Mortgage Is Right for You?
ARMs and FRMs are both beneficial, but it depends on your situation. An ARM may be good for you if you are getting close to retirement or living in your current house for a short period. It lets you build equity and save for your dream house or retirement by taking advantage of a lower interest rate. Meanwhile, an FRM may be your best option if you plan to settle down and live in your house long-term or prefer having predictable payments without considering market rates.
Conclusion
The right mortgage for you depends on your needs and circumstances. When choosing between an FRM and FRM, don’t forget the differences mentioned in this guide. If you need further assistance to get the best loan and pick one that makes the most sense for your situation, reach out to a trusted mortgage company.
PENNIX Mortgage is the best mortgage lender in Cumming, Georgia. We can help you determine which type of financing perfectly matches your needs. Contact us today for inquiries!
