As you enter the home-buying process, you will inevitably encounter an array of unfamiliar terms that you’ll need to learn because they play a big role in your financial future.
The types of loans you have to choose from are part of that.
When beginning the mortgage process, one of the first and most important decisions you’ll need to make is whether you want to go with an adjustable-rate mortgage (ARM) or a fixed-rate mortgage (FRM). Both of these could potentially have a big effect on your borrowing costs, so it’s important to navigate the differences early on.
Let’s talk about those differences.
Adjustable-Rate Mortgages (ARM)
These types of mortgages are loans with interest rates that can vary throughout the duration of the loan. Typically, they will have a fixed interest rate for an initial period of time and then fluctuate based on market conditions. The initial rate is lower than a fixed-rate mortgage, which gives you more purchasing power toward a more expensive home, but the rates can increase later on.
Because the timing and speed of interest rates are unpredictable, so are adjustable-rate mortgages. The benefit to these types of mortgages is that you pay less in the early years of your loan.
Fixed-Rate Mortgages (FRM)
A traditional fixed-rate mortgage is the most common type of loan program, where the monthly principal and interest payments never change during the life of the loan. These mortgages are available in terms ranging from 10 to 30 years and can be paid off at any time without penalty. This mortgage has a structured payoff schedule, called “amortized,” so that it will be completely paid off by the end of the loan term. There are also “bi-weekly” mortgage payment schedules available that can shorten the loan.
Because the rates are fixed, there aren’t any surprises when interest rates rise and fall. You know what you’ll be paying from the start. However, while fixed-rate loan terms are generally easy to understand and the rates are predictable, the starting rates during the early years are often higher than ARMs.
There is a solution for almost every situation, and we’re here to take away the guesswork. We’ll be with you every step of the way and answer any questions you have about your home loan.
Our team has 75 years of combined experience in serving the Boise area and would love to help you reach your goals of homeownership. Please contact us today to get started!