There are two primary types of mortgages available to prospective homeowners, fixed-rate and adjustable — also known as a variable rate. One of the most common questions among those who are setting out to obtain a mortgage is in relation to which of these options will be better for them.
It should be noted that you can’t have it both ways, and one option may be better for you than another. Learning more about how to make a decision between the two is the first step towards finding the mortgage that is right for you, and the differences are rather easy to understand.
The first option that you should consider learning about are fixed-rate mortgages. With this type of mortgage, you pay a fixed interest rate that doesn’t change or shift over time — the rate remains the same throughout the entire life of the loan.
This is not to say that the principal and interest paid each month can’t vary, however. It’s a common misconception among first-time homebuyers and is best cleared up as early on as possible. In the end, the total payment remains the same, which makes budgeting quite easy with fixed-rate mortgages.
One of the major benefits of fixed-rate mortgage is the feelings of stability they provide. Since interest rates will never rise or fall, you’re automatically protected by any surprises which might be associated with such a scenario. This type of mortgage is easy to understand and an excellent option for those who prefer to put together solid, stable plans.
If there’s a downside to fixed-rate mortgages, it’s that qualifying for a loan for a high-interest mortgage can be very difficult, especially considering the fact that monthly payments can be quite expensive.
The other most popular form of a mortgage is a variable-rate, which differs quite a bit from fixed-rate. The main difference is that unlike fixed-rate mortgages, interest rates can rise throughout the life of the loan. Typically, the rate associated with adjustable mortgages is lower than a comparable fixed-rate mortgage would be at first.
This is one of the most enticing reasons for people to consider such a mortgage, although it’s far from being a major benefit if you don’t read the fine print. Over time, the interest rate on a variable mortgage can be far higher than you’d be likely to see with a fixed-rate mortgage.
In addition to the fact that adjustable-rate mortgages can end up costing you more money in the long run, it’s important to note that they also tend to be far more confusing than the alternative. Unlike fixed-rate mortgages, variable-rate options come along with a great deal of terminology that needs to be learned, and the fact that rates can change on a dime makes it much more difficult to plan for stability.
Still, variable-rate mortgages typically offer low monthly payments at first, which makes them very attractive to those who are on a tight budget. They also enable the buyer to qualify for a much larger loan than they’d likely be able to with a fixed-rate mortgage.
Which option is right for you?
When determining which mortgage option is right for you, it’s imperative to take your personal situation into consideration. For those who are excellent at budgeting and prefer a stable loan situation, fixed-rate mortgages are undoubtedly the way to go.
If saving money off the bat is important to you, though, you might find adjustable-rate mortgages to be a better deal. In the end, it’s best to work with a knowledgeable real estate agent, as well as a good accountant when deciding upon which type of mortgage to embrace — especially if this is the first time you’ve ever bought a house.
Erik is a staff writer for MyBankTracker.com, who specializes in real estate, consumer banking and personal finance.