When it comes to financing a home purchase, borrowers have various options to consider. Two popular choices are adjustable rate mortgages (ARMs) and traditional fixed-rate mortgages. While both have distinct features and advantages, understanding your financial goals, risk tolerance, and market conditions can help you make an informed choice.
A Fixed-rate mortgage is the more traditional choice and offers borrowers the advantage of a fixed interest rate for the entire loan term. You can select a term and an interest rate and that interest rate stays the same throughout the term of the mortgage. With fixed-rate traditional mortgages, borrowers don't need to worry about fluctuating interest rates or unpredictable payment amounts.
A 7-Year Adjustable Rate Mortgage (ARM)has a segment of time during which the interest rate is fixed. After that, the rate is determined by an economic indicator. A 7/6 ARM means it is an adjustable rate mortgage with a set rate for the first seven years of the loan, and then a new rate every 6 months after that. If interest rates decrease over time, borrowers with an ARM can benefit from lower monthly payments, saving money in the short term.
So, which is the right one for you? The answer really depends on several factors.
How long do you plan to own your home?
One thing you’ll notice right away when shopping for mortgages is that ARMs have lower interest rates, sometimes by as much as 0.50%. On a $200,000 mortgage, that saves you as much as $70 a month! If you're considering a shorter-term ownership, anticipate refinancing, intend to buy a house, make improvements, and resell it for a profit, the ARM might be a wise investment.
What’s your risk tolerance?
Fixed-rate mortgages are the safer, more conservative choice. An ARM does offer the potential to lower your monthly payment, however, you will have to evaluate your comfort level with potential interest rate fluctuations after the initial fixed period. When selecting an ARM, there are protections in place. When you select a Tyndall 7-Year ARM, rate caps will protect you from excessive rate hikes when there is an adjustment period.
If you are considering homeownership, it is important to understand that your monthly mortgage payment includes more than just the principal and interest on your loan. Identifying the potential impact of taxes and insurance on your monthly mortgage payment is crucial for budgeting and financial planning. Carefully review and consider these factors to ensure you select the mortgage product that is right for you. An expert from the Tyndall Mortgage Team is here to guide you through the entire process.