The two most common forms of mortgages that we see in the United States include the Fixed Rate mortgage and the Adjustable Rate mortgage. The mortgage marketplace does offer quite a few more options than those two but they are by far the most popular choices for American homeowners. While they are similar in that they are both very popular, they are both very different in their structures.
Which one will best suit your needs? That depends on several factors. Let's dive into how these mortgages are setup.
Fixed-Rate Mortgages.
When you have a Fixed-Rate Mortgage, you are given an interest rate that is set in place, it does not change; look at the name of the mortgage, the rate is fixed. This option is much easier for homeowners to budget since the monthly payment remains the same from month to month. Over time, the payment will obviously get smaller and smaller as you pay off the outstanding balance, thus, causing the amount of money generated from interested will reduce as well.
Even though the mortgage interest rate is the same, the rate you are given will depend on which mortgage term you choose. The longer term you choose, the larger your interest rate will be. When you start paying your mortgage, the majority of your payment will go towards interest; however, this will change as you continue on and pay more payments.
Adjustable Rate Mortgages.
Adjustable-Rate Mortgages are a little bit more complex than a fixed. With this structure, your interest rate will vary over time. The rate will change depending on a chosen schedule of points in time when the rate will change and how high and low it can move. At the start of your ARM, the rate will remain the same, this is the initial period; once this time is over, that is when you will be subject to the rate changing. The attractiveness of an ARM is the initial, low monthly payments.
There are several components to the ARM:
- The adjustment frequency: this is the amount of time that will go by between the adjustments.
- The adjustment indexes: these are the benchmarks that are tied to your rate.
- Your margin: This is the rate that you agree to pay, which is a certain percentage more than the adjustment rate index.
- The caps: these are like bookends, they determine how high and low your rate can move in an adjustment period.
- The ceiling: this is how high your rate can move throughout the entire life of the loan.
Whichever loan type you choose is up to you. Questions? Contact TrueFi LLC.