If you’re like many people, you’ll have to use a mortgage loan to buy a home – and there are literally dozens of loan products to choose from.
How do you make sense of them all?
Here’s a closer look at the main types of mortgages: Fixed-rate and adjustable-rate.
Types of Mortgage Loans
The primary types of mortgage loans are fixed-rate and adjustable-rate. Each has its own set of pros and cons, and because no two people have identical needs, it can be tough to determine what’s right for you. You may want to talk to a mortgage broker about your needs – he or she can help you find the right type of product based on your current financial situation.
However, before you do that, it helps to have a basic understanding of the differences between fixed-rate loans and adjustable-rate loans.
What is a Fixed-Rate Mortgage?
A fixed rate mortgage is one in which your interest rate never changes. You’ll find out what your interest rate will be before you even sign your mortgage documents – and you’ll lock in that rate. Your interest rate won’t go up over the life of your loan, which means that your monthly payment will most likely stay the same (unless you have to pay for private mortgage insurance, which is another story).
Pros of Fixed-Rate Mortgages
- Your monthly principal stays the same, no matter the length of your loan
- Your interest rate stays the same throughout the life of your loan
- You can use your exact payment to budget with
Cons of Fixed-Rate Mortgages
- You may end up paying more interest with a longer-term, fixed-rate loan than you would if you had an adjustable-rate mortgage
- It will take longer for you to build equity in your home
- Interest rates are usually higher on fixed-rate mortgages than they are on adjustable-rate mortgages
What is an Adjustable-Rate Mortgage?
Adjustable rate mortgages, commonly called ARMs, have fluctuating interest rates. The rate usually adjusts annually based on current market conditions. Many ARMs have a fixed interest rate for a set period at the beginning of the loan – it’s common for that period to last 5, 7 or even 10 years. After that introductory fixed-rate period ends, the interest rate becomes variable and can (and will) change over the remainder of the loan’s life.
Pros of Adjustable-Rate Mortgages
- Usually ARMs have lower fixed-rate interest for the first few years than a regular fixed-rate mortgage would
- You can save a lot of money on interest payments if interest rates go down at any point during the life of your loan
Cons of Adjustable-Rate Mortgages
- Your monthly payments could go up a lot, based on market conditions, and it can be harder to budget for payments
- If home values fall, it may be harder to refinance or sell your home before the loan resets
What About Government-Insured Mortgages?
While the U.S. government isn’t a mortgage lender, it can help you become a homeowner. Three government agencies currently back some types of loans: The Federal Housing Administration does FHA loans, the U.S. Department of Agriculture does USDA loans, and the U.S. Department of Veterans Affairs does VA loans.
Are You Buying or Selling a Home in Knoxville?
I can help you find the right lender for your needs – and then I can help you find your dream home in Knoxville. If you’re looking for a new place, give me a call at 865-368-5150 or get in touch with me online to tell me what you’d like to see. I can show you any listing in the Knoxville area!