There are a number of factors to consider when deciding on a mortgage for a new home or a home refinance. Everything from credit score to money down to equity can be an important consideration, and as they say, the devil is in the details.
One of the broader choices people are often faced with during these situations is this: Adjustable-rate mortgage or fixed-rate mortgage? These two opposites are really only separated by one major line, but that one element is often the most important factor in determining whether your mortgage ends up being a good investment or a bad one.
At City Creek Mortgage, our expert brokers are dedicated to providing you all the information necessary to make the right mortgage decision – and this is one of the first boxes to check. What makes adjustable-rate mortgages more attractive for some people than fixed-rate mortgages?
Basics of Adjustable-Rate Mortgages
Interest rates are at the crux of every mortgage-related decision, and the first big call you’ll make is whether your interest rate stays the same through the entire life of the loan, or whether it’s open to change based on market factors. If you choose the latter, this is an adjustable-rate loan.
Most adjustable-rate loans actually start out as fixed-rate loans, with mortgage rates that remain constant for anywhere from five to ten years. After that, though, your rates are open to change based on market dynamics. There are limits to how much your rate can go up – never more than 5 percent above your original figure, and always between 2 and 5 percent per adjustment period.
Low Interest Rates
The “adjustable” part of these loans means that you’re making a small sacrifice in some situations – if interest rates go way up during your adjustable period, you’re stuck paying the higher rate even if you started out at a much more favorable number. This wouldn’t be the case with fixed-rate loans, but the trade-off usually comes in the form of a much lower initial rate in the first place. Adjustable-rate loans will start at a way lower point than most fixed-rate loans, and as we noted above, they’ll stay fixed for the first several years before there’s any possibility of a raise.
Perfect for Refinancing
That buffer period where rates remain very low for the first few years makes many adjustable-rate loans perfect for people looking to refinance a home. You can typically refinance up to 95 percent of your home’s value using those low-rate loans, and the long grace period also means people looking to quickly flip a home for profit could be in for a great return. It’s this sort of flexibility that makes adjustable-rate loans attractive to many people, even if they absorb the risk of interest rates which may rise slightly in later years.
Want to learn more about loan types, or any other part of our mortgage service? City Creek Mortgage brokers are standing by.