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  • Aug 06, 2021

Fixed or Adjusted Rate Mortgage: What’s the Difference?

When applying for a home mortgage, you have two options before you: a fixed or adjusted rate mortgage. What’s the difference, and how can you benefit?

Before even purchasing a home, you need to think about your future mortgage. Consider all payment options available to you to determine how you might manage it reliably without breaking the bank. Knowing the difference between fixed and adjusted rate mortgages will allow you to make an informed decision on your home financial situation. Don’t lock yourself into a plan that doesn’t benefit you; choose something that will work to your advantage.

What Is a Fixed-Rate Mortgage?

A fixed rate mortgage is when your set rate of interest does not change for the duration of the mortgage. The principal and interest amounts you pay remain the same, but it is the same payment every time.

Advantage of a Fixed Rate Mortgage

The most significant benefit homeowners see is that there will be no surprises when your mortgage payment comes due. It will not suddenly increase in cost without explanation; it will stay the same no matter the circumstances.

Disadvantage of a Fixed Rate Mortgage

While the payment will never be a surprise, you may lock yourself into a contract that requires payments over a longer period. This can result in higher interest payments, leading you to spend more money over the years than if you chose a shorter-term mortgage.

What Is an Adjusted Rate Mortgage?

When dealing with an adjusted rate mortgage, your starting interest rate is typically lower than if you decided to go with a fixed rate, except this interest rate will increase over time. Over a long enough time, the adjusted rate will surpass the amount you would have paid for a fixed rate. However, these rates are constantly in flux, as they reset after a pre-determined time. You will have to discuss the specific details with a credit union mortgage lender to negotiate the terms and pricing.

Advantage of an Adjusted Rate Mortgage

For the first several years, an adjusted rate mortgage will be significantly less costly than a fixed rate mortgage. Additionally, the lower initial payments qualify borrowers for larger loans, enabling them to afford more real estate.

Disadvantage of an Adjusted Rate Mortgage

The most important disadvantage is in the variability of the payments. While you may be able to pay them off in the present, the increased rate years down the line may be too expensive for you.

What Is Best for You?

When thinking of the differences between fixed and adjusted rate mortgages, you should consider a few factors. You need to understand what you’re getting into with each—whether you can afford the higher initial rate with a fixed rate or if you believe your circumstances will be better in the future to afford more with an adjustable rate. Don’t get in over your head or accept a deal because it seems reasonable at face value; go in knowing exactly what to expect, now and in the future.

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