Mortgages can seem like an impossible puzzle at times. The different mortgage types are particularly confusing to new and experienced Albuquerque home buyers alike.
Mortgages come in two forms: fixed-rate mortgages and adjustable-rate mortgages. There are pros and cons to each type of mortgage, which can make it difficult to decide.
When you’re trying to decide which mortgage to choose, we’re here to help! The purpose of this article is to delve into the details of each mortgage type and discuss which type of home buyer is most suitable for each.
What is a fixed-rate mortgage?
Fixed-rate mortgages have a fixed interest rate. Your interest rate will not change outside of your agreed contract. Despite inflation, your mortgage interest rate will remain the same throughout the term of your loan.
Customers who do not want to risk rising interest rates tend to favor fixed-rate mortgages. Fixed-rate mortgages provide you with a guaranteed rate throughout the life of your loan, unlike other loan types that may be affected by inflation.
In addition to not going up, the interest rate on a fixed-rate mortgage won’t go down either. In some cases, this means that you might miss out on competitive interest rates when mortgage lenders can afford to offer lower rates.
The interest rates offered by fixed-rate mortgage loans will vary from one lender to another. Hence, it is worth your while to shop around.
What is an adjustable-rate mortgage?
Adjustable-rate mortgages are the opposite of fixed-rate mortgages. In this case, the interest rate can change according to market conditions. This means that the interest rate on your mortgage can change as the loan term progresses.
Adjustable-rate mortgages have the main advantage of allowing interest rates to decrease when market conditions allow it. This can result in lower rates for homeowners than those with fixed-rate mortgages.
A variable-rate mortgage can, however, increase over time. As mortgage terms can last for considerable periods of time, the exact interest-rate movement cannot be predicted. Adjustable-rate mortgages allow you to adjust the amount you pay back according to market conditions.
With some adjustable-rate mortgages, interest rates are capped at a certain level. You should always check this before you make a decision, as this could offer some protection against price fluctuations.
Fixed-rate vs adjustable-rate: What are the differences?
Mortgages of both types differ largely in how interest rates are affected by the market. Your monthly interest payment will remain the same with a fixed-rate mortgage. An adjustable-rate mortgage, however, may fluctuate.
It is notable that adjustable-rate mortgages typically have a lower initial interest rate than fixed-rate mortgages. This can make them more appealing to buyers, but you should always consider possible price increases.
A good credit history is required for both types of mortgages. Additionally, both fixed-rate and adjustable-rate mortgages require repayment over time.
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