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Which Mortgage is Right for You - Adjustable-Rate, Interest-Only, or Fixed-Rate?

     

You've found the home you want and you're ready to buy - but how do you determine what kind of mortgage is best for your budget and lifestyle?

It can be tempting to secure a loan with adjustable interest rates and lower initial monthly payments. In some circumstances, an interest-only loan with its lower monthly payments could make sense. A fixed-rate mortgage is usually more expensive to start, but is it best in the long run?

There are several questions you should consider before you decide:

  • Have you thought about how long you plan to stay in your home?
    • If you move frequently, an ARM or interest-only loan could make sense.
    • If this is your forever home, you probably want to lock in a long-term interest rate and monthly payment.
  • What is the current interest rate environment?
    • If mortgage rates are high, an ARM has an advantage because of the initial lower rate. If rates are falling, you could actually see the rate go down. But if the current rates are low, adjusted rates are likely to increase.
  • Could you still afford a monthly payment if it increases dramatically?
    • If interest rates rise rapidly, the monthly payment for an ARM mortgage on a loan of $200,000 could be significantly more than a fixed-rate loan.
    • An interest-only loan payment will increase after the initial term to cover the addition of principal payments.

Bottom line - all three loan types might make sense for you in the right circumstance. As with any significant financial transaction, however, be sure that you understand the impact that the mortgage you choose will have on your monthly budget.

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Tags: Home Loans

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