Thanks to common industry terms such as ARM, FHA, PMI (and many others), the mortgage industry can be understandably confusing to newcomers. If you can master a few key concepts, however, you can ensure that you get the best possible deal on your loan.
One of the most important of these distinctions involves your loan type: Fixed-rate vs. adjustable rate. If you choose the right one, you can potentially save thousands of dollars over the course of your loan.
To help you understand how it works, let's take a closer look at the differences between the two, and why a fixed-rate mortgage is often the smart option.
Fixed vs. adjustable rates
Fixed-rate and adjustable rate mortgages (the latter are often called "ARMs") are the two most popular mortgage types. The difference is straightforward: A fixed-rate mortgage guarantees you the same rate over the life of your loan, while an adjustable rate mortgage can vary.
Generally, adjustable rate mortgages begin with a lower interest rate (often more competitive than you'd get with a fixed-rate mortgage). This lower rate only lasts for an initial period, however. After a pre-determined amount of time lapses (it could vary from months to years), the interest rate is periodically adjusted based on an index.
The benefits of a fixed-rate mortgages are considerable. First, because your mortgage payments are more predictable, it helps you with basic household budgeting. With a fixed-rate mortgage, you can know virtually to the penny what you'll be spending.
Borrowers can also rest easy knowing that their mortgage payments will not rise dramatically as the result of an interest rate hike. Fixed rate mortgages are also easier to understand than adjustable rate mortgages, in part because there is little variance in them from lender to lender.
One of the few downsides to a fixed-rate mortgage is that it can sometimes be harder to qualify for if you have less than ideal credit. There are a variety of federal programs in place, however, that are designed to help borrowers with marginal credit scores secure the mortgage that works best for them.
A fixed-rate mortgage offers security and predictability for homeowners. If you're in the market for a loan, KeyPoint Credit Union is here to assist you. For information, contact KeyPoint Credit Union today.