As a first time home buyer, you are likely going to have to choose between one of the two broad types of mortgages that are available — the fixed rate mortgage or the adjustable rate mortgage. There are however a lot of options available under each type to be considered by anyone wanting to take a mortgage.
As a first timer in the market, the terrain may seem quite unfamiliar and you may be lost as to what package would work for you. Shopping for the lowest interest rate is important but even more important is the deal that will work perfectly for you in the long run.
Basically if you take an adjustable rate mortgage (ARM), the interest rate may either go up or down over time depending on a host of factors. The initial interest may stay the same for months or even years, once the introductory phase elapses, the rates will most likely increase. However there may be times when interest rates are down causing your interest rate to also come down.
Some lenders set a maximum interest rate for ARMs on how high the rates can go and some also set limit on how low the interest rates can go. Also the rates may change very often making it hard to keep up and properly plan.
The flexibility offered by ARMs is its major selling point. A borrower may qualify for a bigger loan should interests rate fall without the need to refinance.
Fixed interest rates on the other hand stipulate that the interest rate will remain the same throughout the life span of the loan independent of whatever changes may occur.
The major advantage of fixed rate mortgages is the predictability of amount due month after month which makes it easy for proper planning.
Fixed-rate mortgages are also less technical and hold very little surprises from lender to lender. The disadvantage is that it may be harder to qualify for this kind of mortgage when rates are generally due to affordability.
Which One of the Two Is Right for You?
What matters the most is to focus on your unique needs and work with your mortgage advisor to get a plan that will be perfect for you as a first time home buyer.
Consider the financial implications of whatever package you choose. Would you be able to keep up with the payments if the interests go higher? Do you intend to stay in the house for a long period of time? All these factors should be well thought through before you make your choice.
ARM will work just fine if the economy is relatively stable but if the economic situation is unpredictable and rates keep fluctuating with no indication that things will get sorted soon enough, a fixed rate mortgage may be more appropriate.