Buying a House? Decide: Fixed vs. Adjustable Rate Mortgage?
Buying a house is a big decision, not only because you must find the perfect house for you but also because you must choose the right mortgage.
And when it comes to financing your home, the largest decision is choosing between a fixed and an adjustable-rate mortgage (ARM).
Here’s what you must know.
Why is Choosing a Mortgage So Hard?
A mortgage is a big decision.
It could be a debt you carry for 5 - 30 years, and it's how you can purchase the place you live.
How well you pay your mortgage affects your credit, and if you get too behind, you risk losing your house, so choosing an affordable mortgage is crucial.
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When choosing your mortgage, you must consider many factors, including the type (fixed or adjustable rate), the interest rate, and the down payment.
You'll want to understand the factors that make up your mortgage, interest compounds on your balance over the life of the loan but, the down payment reduces the amount you borrow, making the payments more bearable or shortening your payment period.
When you sign up for a mortgage it becomes a part of your life for many years and will affect other financial decisions, such as buying a car, taking vacations, and even saving for retirement.
Choosing the Down Payment
A higher down payment can provide lower monthly payments, but you could get into financial trouble if you don’t plan your spendings.
Consider how much you can afford to put down ( it's usually required from 3% to 20% of the total debt), and how much you’ll need for moving, home repairs, home and owners fees, insurance and don’t forget to keep some money in your emergency fund, now that you own a new home, you’ll probably need to increase it.
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Lenders like borrowers to have some 'skin in the game,' so making a down payment may help you get better terms, so weigh your options and determine which works best for you.
How Fixed Rate Mortgages Work
Fixed mortgages have a fixed interest rate. It never changes.
This means your mortgage payment stays the same for the life of the loan.
The only factors that would change it are if your real estate taxes or home insurance costs change.
You don’t have to worry about your payment adjusting and how you’ll afford it.
Fixed rate mortgages keep the same rate you locked in when applying for the loan. Fixed rates are good for those buying their ‘forever home’ or who want stability and don’t want to deal with the uncertainty of changing interest rates.
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