Fixed-Rate vs. Adjustable-Rate Mortgages

May 8th, 2017 By Allison Van Wig in Blog,Buying. Tags: , , ,


Fixed-Rate Mortgages vs. Adjustable-Rate Mortgages - Lakewood Real Estate

As a homebuyer, whether you’re purchasing a house in Long Beach or a condo in Lakewood, you’ll have plenty of options when it comes to financing. The two most common mortgage loans are fixed-rate and adjustable-rate, and you’ll encounter your choices at nearly every lender you talk to.

First things first, though: Remember that it’s in your best interests to shop around for the best mortgage terms. No two lenders will offer you exactly the same things, so get quotes on interest rates and other terms from as many lenders as you can.

What is a Fixed-Rate Mortgage?

A fixed-rate mortgage loan is one in which your interest rate stays the same, no matter how long you hold the loan. A fixed-rate home loan can last 10, 15, 20, or 30 years. Most people opt for a 30-year mortgage when they’re getting a fixed rate because the payment is lowest… but at the same time, the bottom line is higher.

Let’s say you’re paying 5 percent interest on a $100,000 home loan for 10 years. You’ll pay $1,061 per month, and the total cost of the mortgage will be $127,279, so you will have paid $27,279 in interest.

If you’re paying 5 percent interest on a $100,000 home loan for 20 years, you’ll pay $660 per month. However, the total cost of the mortgage will be $158,380 and you will have paid $58,389 in interest.

Finally, if you’re paying 5 percent interest on a $100,000 home loan that lasts 30 years, you’ll pay $537 per month. The total cost of the mortgage is nearly double its original cost, though—you’ll pay $193,256 for the whole mortgage, with $93,256 of that going only to interest.

What is an Adjustable-Rate Mortgage?

An adjustable-rate mortgage loan, or ARM, is one in which your interest rate can fluctuate. Usually, you’ll have a fixed-rate period at the beginning of the loan (typically, it’s 5, 7, or 10 years). Once that fixed-rate period ends, your interest rate will go up and down annually to mirror the market.

A fixed-rate mortgage can be great when interest rates are low, and in most cases, the lender will put a cap on the interest rate.

What Happens if You Can’t Put Down 20% of the Home’s Sales Price?

In most cases, except with certain types of financing (like VA loans and some first-time homebuyer programs), you’ll have to pay for private mortgage insurance if you can’t come up with a 20 percent down payment to buy a house.

Private mortgage insurance gives the lender something to fall back on if you default on your payments. The reason lenders want you to put money down is so that you’re invested in the property; you’ll have something to lose, too.

What’s the Right Type of Financing for You?

Talk to your Realtor® to get some names of local lenders who can give you mortgage quotes. While nobody can make the decision for you, you do need to know that you have options. A good mortgage lender will tell you about all your options so you can make the most informed decision.

Are You Buying a Home in Lakewood, Long Beach, or a Nearby Community?

We’d love to help you find the perfect home in Lakewood, Long Beach, or the surrounding communities. When you’re ready to start exploring your options, call us at 562-882-1581 to let us know what you need. We’ll help you find it.

In the meantime, feel free to explore our:

Lakewood homes for sale

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Long Beach homes for sale

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Seal Beach homes for sale

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