As anyone who has been through the mortgage process for buying or refinancing a home can tell you, one of the simplest decisions in the process is also often one of the hardest: The choice between adjustable-rate loans and fixed-rate loans.
This decision may seem relatively elementary, and is based on one major difference – whether the mortgage rate will remain constant throughout the life of the loan, or whether it’s open to change after a certain period based on various market factors that may influence things. This choice could easily be the determining factor in whether you look back on your loan as successful or unsuccessful, and our brokers at City Creek Mortgage are here to make this and other decisions as plain and painless as we can.
Fixed-rate loans are more beneficial for people in many situations. What are these, and how do fixed-rate loans work?
The purpose of a fixed-rate loan is very simple: To keep your mortgage rate constant throughout the entire loan, no matter how long the loan will run for. Regardless of any market factors or influences, your rate will not change.
This is in contrast to adjustable-rate loans, where rates will remain constant for a few years but then could skyrocket if the market dictates it. You’ll generally have to pay a higher initial interest rate with fixed-rate loans, but the benefit comes in the form of absolute certainty about your payment trajectory, even decades down the line. This is certainty you can never get from an adjustable-rate loan, even if there’s always a chance you come out in better shape if market dynamics work out in your favor.
That’s the primary benefit of fixed-rates: Certainty and security. Maybe some folks with high risk tolerance gravitate toward adjustable-rate loans, but those who prefer to play it conservatively and plan diligently may lean in the other direction in many cases. Fixed-rate loans are perfect for people operating on a strict budget, or who may have large future expenses like a child’s college tuition.
Fixed-rate loans generally require higher credit, and as such, they’re denied a bit more often. Acceptance into a fixed-rate mortgage program is a sign you’ve done at least reasonably well in your finances – well enough that a lender will allow you a fixed interest rate even with the possibility of market increases coming years down the line. This can have tangential benefits in other areas for many people.
Our City Creek Mortgage brokers are experts on the detailed differences between these types of loans, and they’re looking forward to helping you with these and all mortgage- and refinance-related decisions.