The Difference Between A Fixed Rate Mortgage & An Adjustable Rate Mortgage
There are many loan options out there for Knoxville first-time buyers. You often hear a lot about different loan types. There’s FHA, USDA, THDA, and VA. But, one thing that many buyers forget about is the different rate types.
In addition to these many types of loans, there are two different rate types, adjustable rate mortgages (ARMs) and fixed rate mortgages. These are two very different rate options, so it’s important that you know the difference.
In this post, we’ll explain the difference between a fixed rate mortgage and an adjustable rate mortgage.
What’s A Fixed Rate Mortgage?
Fixed rate mortgages are the most common type of mortgage. Over the course of the loan term, the interest rate remains the same. This means that your principal and interest payment remain the same over the course of the life of the loan as well.
Fixed rate mortgages come with a variety of loan terms. They are often 30 years or 15 years, but there are other options in between.
Fixed rate mortgages are appealing because of their dependability. There is no change over the course of your loan to the principal and interest payment. The only thing that can cause your payment to change is if your escrows change, but that can only cause your payment to change for just a little bit.
What’s An Adjustable Rate Mortgage?
An adjustable rate mortgage, or ARM, is a mortgage where the mortgage rate varies over the life of the loan. Most of these loans have an initial rate for a set period of time, then the rate adjusts over time depending on what the market is doing. There are limits on how high the interest rate can go.
An adjustable interest rate is obviously a bit risky since you never really know what interest rates can do. This is why these are often not a popular loan option among borrowers. ARMS often start with lower payments, but with the chance of greatly increased payments, many borrowers opt for a fixed rate mortgage.
Determining The Best Option for You
You’ll want to consider both the good and the bad about each of these mortgage options. There are good and bad things about both and they’re suited for certain people better than others, but that is why it is great to have both potential options.
ARMs can be nice in the fact that they’re interest rates start off lower. In the years that your interest rate is lower, you can save hundreds of dollars. So, if you’re saving for a wedding or preparing to have kids, these savings can go a long way. The catch, though, is that this savings only last a period of time. So, you’d want to make sure that you plan to move on before that interest rate increases. If you only plan to live in a house for a couple of years or will be transferred, an ARM can be a nice option to save some money.
On the flip side, a fixed rate mortgage is dependable. You know what your mortgage payment is over the life of the loan. With mortgage interest rates still historically low, if you plan to stay in a house for a long time, a fixed rate mortgage will off you the stability that you want.
Buying your first Knoxville home is an exciting and overwhelming experience. If you’re like most first-time buyers, you may not be sure where to start. If there is anything we can do to help you in your home search, please do not hesitate to contact us. We’ve helped countless homeowners buy their first home and we’d love to do the same for you. Rick can be reached at 865-696-9002 or via email at [email protected]. Kati can be reached at 865-696-1888 or via email at [email protected].
Are you ready to start your home search? Visit our home search page to get started today. Or, be sure to keep up with our Knoxville First Time Home Buyer’s Blog to keep up with the latest information about buying your first home.