Which Mortgage is Right for You?

Buying a home is a significant accomplishment in your life.

As you’re separating your wants from needs and finding the perfect home, spend some time understanding your mortgage options.

Lenders offer two basic types of mortgages: fixed-rate mortgages and adjustable-rate mortgages. While you will likely find different loan options within those two categories, your first decision is choosing whether you want a mortgage with an interest rate that never changes during the term of the loan, or one with an interest rate that starts low but can vary over the loan term (either up or down).

When it comes to budgeting, you know what you’ll get with a fixed-rate mortgage.

1. Fixed Interest Rate: Fixed-rate mortgages offer an interest rate that will never change during the term of your mortgage. If you’re borrowing during times of low interest rates, this is a valuable perk because you’ll know your interest rate will always stay low.
2. Predictable Payments: With a fixed-rate mortgage, your monthly total amount paid for principal and interest will not change. However, if you escrow property taxes or homeowner’s insurance and the amount of either goes up, you’ll see an increase in your monthly payment attributable to the higher amount(s).
3. No Surprises: Because your rate is fixed, it’s easy to figure out your monthly budget for housing.
4. Term: Another factor to consider with a fixed-rate mortgage is the term of the loan. A 30-year term is a popular option because it offers the lowest monthly payment. However, you’ll pay more interest over the life of the mortgage compared to a 15-year or 20-year term.

• You want to know what you’re going to pay for your mortgage every month.
• You plan to live in the home for a long period of time.
• You’re borrowing during a period of low interest rates.

An Adjustable-Rate Mortgage (ARM) offers attractive features for some borrowers.

1. Fluctuating Rate: The interest rate of an ARM will stay fixed typically for three, five or seven years and then may adjust annually for the remaining term of the loan. In the early stages of the ARM, your interest rate may be lower than the current market rates offered on a fixed-rate mortgage. Since future rates are uncertain, it’s important for you to determine if you can afford larger monthly payments in the event your rate adjusts upward.
2. Interest Rate Ceiling: There is a ceiling that caps your ARM’s rate increases, which varies by loan option. Your interest rate may adjust based on an index, such as interest rates tied to the prime rate or Treasury bills.

• You want an initial rate that may start below current market rates for fixed mortgages.
• You plan to live in your house for a short period of time.
• Interest rates are relatively low now, and you believe they could go lower in the future.

Buying a home is an exciting stage in life. Make sure you select the right type of mortgage that will work for you now, and in the future.

Want to learn more? Use our mortgage calculator to compare your payments with both fixed-rate and adjustable-rate mortgages. Make sure you choose the right mortgage to suit your needs. Our loan specialists at First American Bank are here to help you every step of the way. Feel free to reach out online or visit one of our branches today.