The difference between a fixed-rate and an adjustable-rate mortgage is the amount of time the interest rate of the loan is fixed. With a fixed-rate mortgage, the interest rate is locked in at origination and will remain fixed for life of the loan. With an adjustable-rate mortgage, the interest rate remains fixed for a set amount of time but then may change based on the market rates at the time of the rate adjustment.
Due to the higher risk associated with an adjustable-rate mortgage, the initial interest rate is generally lower than the fixed-rate option. Some borrowers may feel that a lower interest rate is worth the gamble, but that’s not always the case. Interest rates are unpredictable. A low interest rate may seem to be worth the risk now, but what happens when the rate adjusts and the payment on the loan increases significantly? This is a risk that must be carefully weighed. If you don’t plan on being in the house when the rate adjusts, or your plan is to pay off the mortgage prior to the first rate adjustment, then an adjustable-rate mortgage might be a good option.
The best advice is to go with the worst-case scenario. If you have concerns that you will still be paying on the mortgage after the interest rate adjusts, it’s probably better to go with the fixed-rate option. Having the security of consistent mortgage payments makes it easier to plan for the future. You will also have the option of refinancing if interest rates go down while you’re paying your existing mortgage.
As always, seeking advice from a knowledgeable loan officer can help you make the best decision for your situation. For more information on how to choose between fixed and adjustable-rate mortgages, call Simply Home Lending today.