Adjustable-Rate Mortgage vs. Fixed?

Which mortgage would you choose? Adjustable Rate, Fixed Rate, Hybrid Rate? What are these financial terms? I am lost! Not to fear, let's break down the meanings and benefits of each of these products.

A fixed interest rate on your mortgage loan is an interest rate that always stays the same. This means your mortgage payment will always be the same every month. There will be no surprises to the amount, due date, and rate every single month. It is the practical mortgage rate. There is little risk and very predictable throughout the life of the home loan amount. The only way your mortgage payment would change is if your taxes or homeowner’s insurance increase and they are included in the monthly payment.

Benefit: This loan type is perfect for anyone wanting to live in the home for a long time (10 years or more) and is comfortable with the stable monthly payment.

An adjustable-rate mortgage will change over the life of the loan. These loans are historically offered at a lower “initial rate” than fixed rate loans. There is usually a “fixed” period for the first one to five years and then the rate is subject to change (up or down) based on market conditions at the contracted adjustment time. The payment goes up or down based on the rise or fall of the rate. The terms are clear at the time you sign the paperwork for this type of loan. It is important to know how often and how much the interest rate can change and what the lifetime interest rate cap is.

Benefit: This loan type is great for buying a “starter” home or a home in an area that you do not intend to stay long term. Many people use these loans to secure housing when they do not plan to keep the home longer than the initial fixed rate period.

There are Hybrid loans with a low fixed interest rate for a certain amount of time. Once the term of the introductory rate expires the loan becomes an adjustable-rate mortgage. A good way to picture these loans is basically they are like special rate interest credit cards that have an amazing intro rate for 12 or 24 months. Once that time period ends the loan defaults to the market interest rate on your mortgage home loan.

Benefit: This loan is great for someone who needs a lower initial payment in order to qualify for the loan or to have some extra cash flow in the early stages of home ownership. Most people who choose this loan type are those that have a sense of certainty that their income will increase during the introductory rate period. It is also a good option for investors or those that plan to only to live in the home for one or two years.

Remember that depending on your financial situation, and the economy you can always refinance and change your loan terms. Please note that each time you refinance it can be costly. You need to consider the cost of additional fees and closing costs when deciding when and how to refinance your current mortgage. Seek the professional guidance of a seasoned loan officer to assist you in understanding how each option may benefit you. A great loan officer will give you two or three choices so you can weigh the pros and cons before choosing the product that is best. If you have any questions or need further assistance, feel free to contact Jason Kelly 925-989-2790. We are always happy to help.