When searching for just the right home, most buyers will of course be concerned with what their eventual new monthly payment will be – and, in many cases, unless they’re paying cash for their new residence, a key factor in what that new payment amount will be involves the type of mortgage that is secured.
A fixed rate mortgage is one in which the interest rate will remain the same throughout the entire life, or term, of the loan. In this case, the amount of your payment will also typically stay the same.
With an adjustable rate mortgage, or ARM, the interest rate can “adjust” or change throughout the life of the loan – and because of this, the amount of your payment can rise or fall as well. There are actually many different types of ARMs. Some of the most popular of these include mortgages where the interest rate – and the payment – will remain the same for the first 3 or 5 years, and then the rate and payment will adjust once per year for the remainder of the loan’s term.
Which Option Is Best For You?
Whether you opt for a fixed rate mortgage or an ARM today will depend in large part on your specific situation. In order to narrow down your answer, here are the steps that you should take:
If you haven’t already done so, you should ideally meet with several lenders and determine what you can qualify for, based upon your income, debt, credit score, and other necessary criteria. This way, you will know exactly how much you can borrow.
Determine Your Tolerance for Risk
You should also determine how much risk you want to take. This is because going with an ARM can subject you to the risk of your payment increasing in the future – something that you may not be comfortable with if you are more risk-adverse.
Consider Your Plans for the Future
If you only plan to stay in the home for a short period of time, however, then going with an ARM may be your better alternative. This is because going with a 5/1 or a 3/1 ARM could allow you to obtain a lower interest rate for those first few years than going with a fixed rate mortgage.
In any case, it is always best to consider all of your options prior to moving forward, and then making your final determination.
If you’re considering buying or selling in the Orlando or surrounding area, contact us. I have more than 20 years of experience in assisting buyers and sellers with the many options that are available to them in today’s real estate market.