Pick the Right Type of Loan for Your Real Estate Purchase

By on May 21, 2013

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Comparing Adjustable-Rate and Fixed-Rate Mortgages

Whenever you finance a mortgage to purchase a property, you have several choices when it comes to loan types and term lengths. Typically, homeowners will apply a fixed-rate mortgage with the same interest rate and payment set for the life of the loan. Sometimes it is advantageous to apply for an adjustable-rate mortgage (ARM) which will adjust rates and payments according to current markets.

There are drawbacks and benefits to each of these mortgage types. If you want to get the most out of your real estate investment, before you purchase a property or consider refinancing your current loan, learn more about beneficial and burdensome loan types.

Fixed-Rate Mortgages are Simple and Secure

Unlike an adjustable-rate mortgage, borrowers will not have to contend with fluctuating rates or monthly payments. A fixed-rate mortgage are simple and secure contracts allowing homeowners to predict and budget for exactly how much they will owe each month until the loan is paid. These simple loans tend to be a more popular product since they inherently lack an interest rate risk, but simplicity also means these loans are not as flexible to a borrower’s needs.

Adjustable-Rate Mortgages Have Flexibility

Adjustable-rate mortgages (ARMs) begin with an introductory rate for anywhere from 1 month to 10 year terms before they begin adjusting to reflect current market rates. If the interest rates go down, great! Unfortunately, it is often the case that rates go up and borrowers are forced to meet larger monthly payments.

ARMs do have their benefits. Some borrowers need flexibility when it comes structuring lower mortgage payments or purchasing an expensive home. The bank is essentially rewarding the borrower with a lower initial rate because they are taking the risk that interest rates could rise in the future.

To manage the risks associate with an ARM, borrowers will want to pick the right type of adjustable rate mortgage. Purchase a loan with restrictions, (periodic or lifetime) caps and rate make-up provisions. Caps are limits on how much an adjustable rate mortgage can actually adjust. These options allow ARMs to be affordable and flexible to a borrower’s specific needs.

Which Loan is Right for You?

When choosing a mortgage, borrowers need to consider a number of personal factors and compare them with variable and unpredictable economic realities. Interest rates will rise and fall, homeowners will experiences periods of growth and reduction of personal finance, and the real estate market will continue to boom and bust. Purchase the type of loan that is most beneficial, consider the following questions:

  • What size mortgage payment can you currently afford?
  • How long do you intend to live on the property?
  • Are interest rates predicted to rise or fall?
  • How much could you still afford if an ARM rises?

An ARM may be an excellent choice if low payments in the short-term are your primary concern or if you don’t plan to live in the property long. If current interest rates are high and expected to fall, an ARM will ensure that you can take advantage of lower rates without the need to refinance. And if a stable payment structure is important to you when interest rates are predicted to rise, a fixed-rate mortgage may be the way to go.

If you have an Arm, speak with your lender to account for any worst-case-scenarios so you aren’t blindsided by payment adjustments.

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About Terri A. Kamoto

Senior writer for FSN - Terri is a former financial analyst dedicated to making personal finances, budgeting, investment and insurance advice accessible, up to date and easy to understand. It is hard to find professional advice written in a language someone without a financial background can understand. Terri helps companies synthesize industry lingo and expertise into clear and informative content which builds smarter, financially successful individuals. You can find Terri on !

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