Money For Lunch – First-time homeowners: Choosing between adjustable and fixed rate mortgages

First-time homeowners: Choosing between adjustable and fixed rate mortgages

November 2, 2016 7:52 AM0 commentsViews: 11

Mortgage interest rates still continue to fall in Australia, with dozens of cheap deals even getting cheaper despite the cash rate staying on hold. In fact, about 180 fixed and variable rate loans fell in September and now a large chunk of propositions is well below the four percent mark with prospects of additional drops in the coming months.

Fixed-rate mortgages and adjustable-rate mortgages (ARMs) are the two main mortgage types. While the marketplace offers many varieties that fall into these two categories, the first step when looking for a mortgage is defining which of the two main loan types – the fixed-rate mortgage or the adjustable-rate mortgage – best suits your current requirements.

It all comes down to interest

To start, fixed rate home loans from banks and lending companies are a type of loan wherein interest rate never changes. On the other hand, an adjustable-rate mortgage resets its interest rate at specific intervals and can be a good tool for homebuyers with goals in mind.

Adjustable rate mortgages generally start with a set interest rate for a specified period of time, then periodically adjust the rate continuously. A “5/1” ARM means that your rate will be fixed for a period of five years, and then adjusted yearly. Most lenders extend the length of the initial rate lock from the usual five years up to 7, 10 or even 15 years, making it even more attractive than other mortgage loan types.

Choice of mortgage is different for every buyer

If you have a growing family, are settled into your career, and are ready to set down roots in a neighborhood you love, then 30- or 15-year fixed rate home loans may be right for you. Because of the locked-in rate, you’ll always know how much your payment will be.

Ab ARM usually starts with a lower interest rate, which means your monthly payment would be cheaper, at least for as long as the rate is fixed. This feature may allow you to qualify for a larger loan, and in some cases, a bigger house. This most often appeals to a younger first-time homebuyer.

Payment modes

In hopes to entice more businesses, some mortgage companies let borrowers make interest-only payments that can extend up to 10 years. In this arrangement, the monthly payment only pays interest on the loan but doesn’t make a dent in the principle. While this allows an even lower payment to start, but you are also setting yourself up for some sizable jump in monthly payments when the interest only term expires. If the interest rates rise during the promotional period, it will make the future payment even higher.

The main advantage of a fixed-rate loan is that you (the borrower) are protected from abrupt and potentially weighty surges in monthly mortgage payments if interest rates rise. Fixed-rate mortgages are very easy to comprehend and vary little from lender to lender.

End Note

Which Loan Is Right for You? You need to consider a wide range of personal factors and balance them with the present economic situation of an ever-changing marketplace. Regardless of the loan that you select, picking carefully will help you avoid expensive mistakes. Best of luck with your home and mortgage hunting!

Leave a Reply

You must be logged in to post a comment.