Securing a home through mortgage lending in Salt Lake City requires significant decisions. One of such decisions is the type of interest rate to get – fixed-rate mortgage or adjustable-rate mortgage (ARM)?
Understanding both options and their differences can help you choose the best mortgage type. This sole decision can significantly impact your financial stability over the loan’s lifespan.
In this article, we explore the benefits and drawbacks of both fixed and adjustable-rate mortgages.
Understanding Fixed-Rate Mortgages
As the name implies, the interest rate of fixed-rate mortgages remains constant throughout the life of the loan. Once you purchase this type of mortgage, you’re confident of what the interest rate will be from start to finish.
This interest rate will depend on various factors, including the length of the term, the price of your home, your credit history, the size of your down payment, etc.
Pros of Fixed Rate Mortgage
- Predictability
With a fixed-rate mortgage, you can anticipate their monthly payments with precision. Knowing exactly how much you’ll pay at the end of each month can provide peace of mind.
- Long-Term Planning
Fixed-rate mortgages allow for long-term financial planning. This is because you can determine how much you would have left after paying your mortgage every month.
- Protection Against Market Volatility
In a fluctuating real estate market, fixed-rate mortgages can protect you from sudden interest rate increases. This stability can be precious during economic uncertainties.
- Ability to Compare Loan Options
Fixed mortgage rate allows you to compare the interest rate of several mortgage lenders in Salt Lake City.
Cons of Fixed Mortgage Rate
- Higher Initial Interest Rates
Fixed mortgage rates tend to be higher than the initial rates of adjustable-rate mortgages (ARMs). This means that in the short term, fixed-rate borrowers may pay more in interest.
- Limited Interest Rate Reduction Benefits
If market interest rates decrease significantly after obtaining a fixed-rate mortgage, you won’t immediately benefit from these lower rates. However, in this situation, you may choose to refinance your loan.
- Potentially Longer Commitment
Fixed-rate mortgages typically have a long duration of repayment. This may be better if you plan to sell your home or move shortly.
- Higher Qualification Criteria
Fixed-rate mortgages may have stricter qualification criteria. This makes it more challenging for some borrowers to secure a fixed-rate mortgage. Some requirements include a high credit score or a particular amount of down payment.
Who Should Go for Adjustable-Rate Mortgages (ARMs)?
An ARM is a type of loan where the interest rate on the mortgage can change over time. However, this fluctuation is usually after an initial fixed period. Just like fixed mortgage rates, adjustable-rate mortgages have their pros and cons.
Pros of Adjustable-Rate Mortgages
- More Straightforward Means for Home Acquisition
ARMs often start with lower interest rates than fixed-rate mortgages. This feature makes homeownership more accessible for those looking to enter the competitive real estate market.
- Short-Term Savings
Borrowers who intend to stay in their homes for a relatively short period may benefit from ARMs. This is because a lower initial rate can lead to substantial savings in the short term.
- Flexibility
ARMs offer more flexibility, allowing homeowners to take advantage of falling interest rates without the need to refinance. If market rates drop, your monthly payments may decrease as well.
- Lower Qualification Criteria
ARMs may have more lenient qualification criteria, making them more accessible. As such, borrowers with lower credit scores or smaller down payments might still be eligible to apply. This can be particularly beneficial if you have limited financial resources.
Cons of Adjustable-Rate Mortgage
- Potential for Rising Interest Rates
If market interest rates increase, ARMs can lead to higher monthly mortgage payments. This risk can result in financial strain for borrowers if they need the means to absorb the increased costs.
- Higher Total Interest Costs
While ARMs may have lower initial interest rates, the rates can later on rise significantly. As such, borrowers could pay more in total interest costs than fixed-rate mortgages.
Bottom Line
Regarding mortgage lending in Salt Lake City, the mortgage choice depends on several factors. Some of these include your financial situation, goals, and risk tolerance. It’s essential to weigh the pros and cons of each option carefully to make the right choice.
Also, it’s best to seek guidance from an experienced mortgage lender Salt Lake City. This will ensure that you go for the kind of mortgage that fits your specific needs and goals.