Lenders provide an extensive array of loan programs with varying interest rates that can be suited to different types of homeowners. Below is a summation of the different types of interest options, along with their features and merits. Your mortgage lender will provide a more comprehensive explanation on each type of interest rate, as well as help you pick which works best for you.
Fixed Rate Mortgage
Just as the name implies, in this type of mortgage loan in which the interest rate is fixed all through the duration of the loan. In other words, your principal and interest do not change in any way. Because of the fixed nature of the monthly payments under the fixed-rate mortgage, this type of loan has a higher initial rate when compared to the adjustable rate mortgage.
Fixed rate mortgage is suited for people who
- Prefer making the same monthly payments continuously
- Want to stay in a particular home for a minimum of 5-7 years
- Don’t want to take the risk of fluctuating interests in the future
- Can pay the higher monthly payment this type of loan requires for the first couple of years.
Adjustable Rate Mortgages means that for any loan you take, the interest rate is fixed for the first 3, 5, or 7 years depending on your choice, after which the rate can be adjusted on an annual basis for the duration of the loan. This is commonly referred to as 3/1, 5/1, and 7/1 ARMs.
Pros of Adjustable Rate Mortgages
- The initial period in which the rate is fixed (e.g. 3,5, or 7) have relatively low payments.
- Ideal for someone who may plan to move within 3-5 years to take advantage of the lower initial payments.
- Interest rates may not necessarily rise – they could drop. Resulting in even smaller payments for you.