This is a common conversation had with first-time homebuyers: How are you going to pay for your home? “With a mortgage!”
That’s the easy answer…most people can’t afford to get into a new home without some financing. It’s important to understand, however, that there are a wide range of mortgage options available to most buyers. Some are cheaper…some are more predictable. Some give you more time, some give you less. Some are better based on your financial situation, and some are better based on your personality.
There are two basic varieties of mortgages: fixed-rate and adjustable-rate. Fixed-rate mortgages feature a locked-in rate across the length of the mortgage, while an adjustable rate mortgage (ARM) changes based on the current market. An ARM typically opens with period featuring a fixed rate below the current fixed rate, however. And, in both cases, the shorter the length of the loan, the lower your rate will be (but you’ll be paying a lot more principle per month).
So what is best for you? Here are a number of questions that you can answer for yourself and get an idea. Remember, no one one is a better guide than a qualified mortgage professional to help you find the best option, but this information can help you come to the table prepared.
Look at your proposed monthly payment. Would you be able to afford it if it were $100 more?
If you answered “no,” then a fixed-rate option is probably your best bet. Fixed-rate mortgages allow you to be confident in your budget. ARMs could always result in lower payments, of course, but it’s not worth risking them becoming unaffordable when the market rate increases.
Will this be a starter home…?
The average time spent in a home, for the past decade of data, is 10 years. Prior to that, it was around six years for two decades. An ARM is an increasingly better option the shorter you plan on staying. The opening fixed rate period can also vary; A 5/1 ARM gives you five years at a fixed rate (lower than the actual market rate). If you see yourself leaving after six years, even 10 years, those first five lower-priced years could save you a bunch. You can also lengthen the initial fixed term on the ARM.
…Or a lifelong investment?
Predicting interest rates for 25 years in the future is near impossible. Consider that in 1993, 25 years prior to today, 30-year fixed rates were around 8%. Compare that to today’s average rate, 4.71%, and it looks awfully smart to lock in the relatively low modern rate while you can.
Are you interested in refinancing later down the line?
Getting a mortgage is an involved process, and many people are not interested in doing it again. Some people, however, are always looking to save a few bucks. Refinancing is a great way to do this…especially if you’re about at the end of your ARM’s fixed rate period. Wink, wink, nod, nod.
Do you want to own your home sooner than later?
The sooner you pay off your home, the sooner you own it. Also, the sooner you pay off your mortgage, the less you’ll pay in the long run. The shorter the term of your mortgage, the more you’ll be paying toward the principal of the property, versus interest on your mortgage. ARMs with a lengthy fixed-rate period can help those looking to build up equity quicker.
Do you just want to get it over with?
If you just want to get the thing done, a fixed-rate mortgage is generally the most straightforward option. It’s nice to know that you’ve got one steady payment for however long you opt to pay off your home. Finding the home of your dreams can be mentally, emotionally, and even physically draining. The right mortgage broker can help. Find a broker who has your best interests in mind, and tell them what you want. They should guide you to the ideal solution for your needs.