If you’re hunting for a new home, you’re probably also mortgage hunting — and if you aren’t, you should be. Your mortgage will help determine just how much home you can afford to buy, and picking the right one is important.
If you’re a first-time homebuyer, the terminology around mortgages can be confusing, so let’s start by walking through the basics. There are two types of mortgages: fixed-rate, which have an interest rate that stays fixed over the life of the loan, and adjustable-rate, which have an interest rate that adjusts periodically based on the market. Fixed-rate mortgages are predictable, so you know just how much your mortgage payment will be for the life of the loan. However, you’re paying for that predictability, because fixed-rate mortgages tend to have higher interest rates (which means higher payments) and can be a little harder to qualify for.
What is an adjustable-rate mortgage?
Adjustable-rate mortgages (ARMs) let you start out with a more affordable payment but are, by their nature, a little less predictable, because their interest rates can change. ARMs are typically listed as numbers, which explain exactly when the interest rate will adjust. The first number tells you how long the fixed interest-rate period will be, and the second number tells you how often the rate will adjust after the initial period.
Not knowing your loan’s interest rate can seem like a risk, but there are some safeguards in place. ARMs typically have caps that limit the amount the interest rate can adjust, so you’ll never get hit with a staggering payment increase. ARMs also have a maximum interest rate you’ll never go over, which can offer some predictability to budget around. But don’t forget: while interest rates can go up, they can also go down, which means each adjustment could have you paying less rather than more.
No matter how you look at it, there’s some uncertainty in an ARM. But that’s no reason to shy away from them, because there are plenty of situations in which this type of mortgage could save you a lot of cash.
When an ARM can help you save
The question to ask yourself before deciding on an ARM or a fixed rate mortgage is how long you plan to stay in the home. If you intend to put down roots and settle in for life, then the predictability of a longer term fixed mortgage may be the best choice.
But if you’re likely to move again in a few years, the lower initial interest rate of an ARM could mean big savings. If you’ll be out of the home before the rate adjusts for the first time, you get all of the advantage of a low interest rate without having to worry about the rate changing later. If you need to move around frequently for work (or just don’t like to be tied down in one place), an ARM may be a great way to build equity in a home along the way.
Consider PenFed’s ARM Products
Our unique ARM products offer a lot of stability for an adjustable-rate mortgage — whether you plan to move away or stay in place. Our low rate adjustable mortgages offer much of the stability of a fixed-rate mortgage while having the lower interest rates of an adjustable-rate mortgage on the adjustable period on the loan.
But an ARM may not be the best fit for every family or every situation. If you still prefer the predictability of fixed rates, PenFed has plenty of options — including VA loans that let veterans get into homes more easily. Compare our mortgage options to find the best fit for you.