Fixed and Adjustable Mortgage Options
Having to navigate your way through the home-buying process can be daunting. This is more so true in the light of different mortgage types. Therefore, getting a solid understanding of the various mortgage loan options will come in handy. Moreover, it will facilitate the task for a borrower. Mortgage interest rates can affect mortgage choice and dictate when it is best to apply a necessary change.
To make things easier, we will summarize the most popular and prevalent mortgage rates. This can be used by prospective borrowers to narrow down choices and make the most suitable decision on a home loan.
Fixed Mortgage Rates:
A fixed mortgage rate is a type of interest rate where the borrower’s monthly payments for interest and principle remain the same for the home loan duration. These rates do not fluctuate so long as the borrower stays in a fixed-term agreement. Borrowers will know the exact amount that needs to be paid. With this type of mortgage rate, borrowers will have an easier time maintaining their budgeting regardless of any rise or fall in the market.
When mortgage interest rates rise, a fixed-rate mortgage is recommended because it locks in the current rate and protects borrowers from further rate hikes.
A long-term fixed mortgage rate is a great option since it safeguards borrowers from upward fluctuations in mortgage interest rates.
Adjustable Mortgage Rates:
As the name suggests, an adjustable mortgage rate is adjusted periodically based on a given index or mortgage calculator. Borrowers should opt for this option when rates are falling. This is because this type of mortgage rate changes at regular intervals (usually every one, three, or five years), allowing borrowers to capitalize on the new, lower rates.
The most common types of adjustable mortgage rates are the following:
10/1-year Adjustable Rates:
This type of adjustable mortgage rates is a great choice for borrowers who:
Plan on relocating within ten years,
Would like a loan that will stay in effect even during changes in plans,
Plan on living in the same home for ten years, or
Seek initial payment stability and are open to changes further down the line.
5/1 and 5/5-year Adjustable Rates:
With this type of plan, the mortgage interest rates and monthly payments remain consistent for five years. Starting in the sixth year, the mortgage interest rates are adjusted every year (for 5/1 adjustable mortgage rates) and every five years (for 5/5 adjustable mortgage rates).
This form of adjustable rates is ideal for borrowers who:
Favor initial payment stability and accept changes in the future,
Desire a loan to remain in force in case of changes in plans, or
Expect to relocate within five years.
3/1 and 3/3-year Adjustable Mortgage:
Under this plan, the monthly payments and mortgage interest rates do not change for three years. Starting with the 4th year, the home mortgage interest rates are adjustable every year (for 3/1 adjustable-rate mortgage) and every three years (for 3/3 adjustable rates mortgage).
This mortgage interest rates will be appealing for borrowers who:
Plan on residing on a property for more than three years,
Prefer initial payment stability but can tolerate changes in the future,
Plan to relocate within three years, or
I would like the loan to remain in effect in case of changes in plans.
1-year Adjustable Mortgage Rates:
Such a plan for adjusting mortgage rates are perfect for borrowers who:
Wish to benefit from the lowest possible rate
Cannot qualify for higher rate programs
Are willing to accept annual payment changes
When shopping for a mortgage rate, borrowers should research the current interest rates and keep an eye on rate activity. In general, mortgage rates reflect the overall behavior of interest rates. This can fluctuate along with the Wall Street securities. By carefully observing key financial indicators and the mortgage market’s general direction, borrowers can improve their chance of gaining interest rate savings.
In conclusion, each borrower must decide which type of mortgage interest rate they are willing to pay. Such a choice depends on the borrower’s financial situation and personal circumstances. Borrowers must also take into consideration how much they are willing to pay each month. A fixed mortgage rate and an adjustable mortgage rate are the two dominant players in the mortgage interest field.