When you begin comparing mortgage options, you might notice that some offer fixed rates while others have adjustable rates. The main difference is the way the interest rate works with the loan, and you might wonder if a fixed-rate loan is always the best option. In many cases, fixed-rate loans are the best choices in mortgages, but this is not always the case. Here is a guide to help you understand the differences and to help you see when a fixed-rate loan is the best choice.
The Way the Interest Rate Works
Most mortgages last anywhere from 15 to 30 years. During that time, you will make mortgage payments to your lender, which consist of principal and interest. At the beginning of the loan, you pay more interest because you owe more money. As you pay down your principal balance, you begin paying less interest. When you have a fixed rate, your rate never changes. It does not matter if your loan lasts 15 years or 40 years. The lender cannot change your interest rate while you have the loan.
If you decide to get an adjustable-rate loan, your rate will not always be the same. The loan will have a stated date where it may change. The date might be five or seven years down the road, and you can almost always guarantee it will change when you reach this date.
Reasons to Choose a Fixed-Rate Loan
No one can predict where interest rates will go in the future. Therefore, you can protect yourself against major rate spikes by getting a fixed-rate mortgage. You will never have to worry about your rate increasing or changing, and if rates decrease, you can refinance your loan to get a lower rate if you qualify for one.
When an Adjustable-Rate Loan Is Better
There are few times when adjustable-rate loans are the better choice. The main reason you might choose one is when you plan to sell your house within a few years. By choosing an adjustable-rate loan, you can have a slightly lower interest rate while you live in the house. Before the rate changes to a higher one, you will sell the house and move, which means the new rate will not affect you.
If you have any questions about mortgage loans, contact a loan officer. A loan officer can help you understand the differences and find the best loan type for your situation.