Fixed-Rate and Adjustable-Rate Mortgages
To make good financial decisions, you need to understand the types of mortgage products on the market. Though there is quite a variety, most are either fixed-rate or adjustable-rate mortgages. Loan terms can also vary, so it’s important to understand how it impacts what you pay and when. Think about what you can afford now, but also look toward the future.
These loans commonly are used because they give homeowners a fixed interest rate over the life (also known as the “term” or time period) of the loan. They often are packaged as 15-year or 30-year terms. Your monthly payments for principal and interest do not change, although payments for insurance and taxes can change.
Adjustable-Rate Mortgages (ARMs)
ARMs are popular because they initially offer a lower interest rate. Over time, the interest rate fluctuates based on an index with which it is associated (like the U.S. Treasury bill rate). Homeowners need to be particularly aware of how much the rate is allowed to fluctuate, over what period of time, and what caps may exist. Unfortunately, too many buyers do not contemplate what changes in jobs, health, the economy or personal financial situations could mean when they initially sign on with an ARM.
These types of mortgages allow you to make interest-only payments (no principal reduction) for a set time period at the beginning of the loan. These types of loans can be very risky, however, especially if the housing market falters. Read more from the Federal Deposit Insurance Corporation (FDIC).