The housing market has gained strength — meaning prices and sales have surged upward — there’s been renewed interest in the type of mortgage interest rates that are available. Mortgage lenders like GoPrime Mortgage, Inc. . (dba PrimeRate Mortgage Lending Inc.) offer loans that use both types of mortgage interest rates:
- Adjustable-rate mortgage loans
- Fixed-rate mortgage loans
Most homebuyers have heard these terms bandied about and may even know the basic differences between them. But each type of loan has advantages and disadvantages that aren’t always completely understood. While fixed-rate mortgages are by far the most common, both types of loans are offered because each is better suited for particular situations. Let’s clear the air and settle the debate once and for all.
Defining Mortgage Interest Rates
Adjustable-rate loans — known as ARMs — offer mortgage interest rates that can rise or fall based on the index and the margin. The index is an interest rate that echoes the current market conditions. The margin is a percentage that doesn’t change. Set by your lender, it’s added to the index, and the two together determine your interest rate.
If the index drops, so does your mortgage payment. By the same token, if the index rises, so do your payments. Typically, though, there’s a cap to the amount that the index can rise on your loan. An ARM may be the right loan for you in certain circumstances — both in the greater economy and in your personal situation.
Fixed-rate loans have one interest rate — captured at the beginning of the loan process and sealed at the closing — that endures for the length of the loan. It doesn’t change once you accept the loan and sign the papers. Normally, your lender arrives at an interest rate based on the 10-year U.S. Treasury Bond Market and your credit worthiness, among other factors. It’s the best rate possible, given your risk level and the bond market conditions.
When ARMs Deliver Value
There are times when an ARM is your best bet, especially if you have a strong credit history. While mortgage interest rates may fluctuate, ARMs often require lower payments when you first close the loan. A lower monthly mortgage payment, even if it’s temporary, has distinct advantages. A lower payment can allow you to:
- Invest the savings or put that money to use in a different way. You could, for example, use an ARM loan to buy, fix up and sell a home in short order, although there are other loan types for that, as well.
- Buy more house than you could with a fixed-rate loan. In other words, you can use the lower payments to buy more expensive house.
- Take advantage of falling mortgage interest rates. When rates are dropping, you get the advantage of lower rates without the expense of refinancing.
- Buy a house for less if you’re not planning to stay through the life of the loan. The lower early payments mean you spend less now, knowing you’ll sell before the higher payments kick in.
- Gamble on the future. ARMs have caps as to how much they can rise or fall in a given year, so they may rise less than the market.
With adjustable-rate loans, you have some uncertainty regarding the mortgage interest rates you’ll pay, so be sure to talk to your lender and listen to the advice given. ARMs aren’t for everyone, nor for every economic situation. But don’t dismiss them out of turn until you know all the details.
When Fixed-Rate Mortgages Make Sense
When mortgage interest rates are fixed, you know exactly how much your monthly mortgage payment is going to be for the life of your loan, regardless of what the rest of the economy does. Fixed-rate mortgages, therefore, are simpler to understand. You know what your monthly payment is going to be month after month, year after year.
With that kind of certainty, you can plan your finances better. Even though fixed-rate mortgage loans come with higher rates, you’re buying that stability, and many homebuyers feel that’s worth paying a little extra for. If you’re buying a house you plan to stay in for a long time, a fixed-rate mortgage is often the best choice.
Is It Right to Bear ARMs?
Because adjustable-rate mortgage loans are best for experienced homebuyers with excellent credit — especially when used in a short-term manner — not many lenders are recommending ARMs to their clients. Projections in 2017 call for the rates to rise. Few homebuyers, therefore, want to see their mortgage payments rise over the next five-to-seven years.
This is the time when mortgage interest rates need to be locked in at a low percentage. While interest rates have likely seen their low point, the current rate is still low by historical standards. So, it’s still a good time to get a fixed-rate loan for your next home. That’s where a trustworthy, independent mortgage lender like Zack Adam of Prime Mortgage Lending of West Asheville can help. Contact Zack today to get the best rate.
