Types of Mortgages

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Most of the time, when people purchase homes they apply for a mortgage.  There are many things to consider to be ready for putting in that application.  One of these things is choosing which type of mortgage is best for you. 

 

Aryeh Brecher, Senior Loan Officer at FML Loans, explains here the two main types of mortgages. 

 

Fixed-Rate Mortgage:  Stability and Predictability 

 

A fixed-rate mortgage is a popular choice among homebuyers seeking stability and predictability in their monthly payments.  With a fixed-rate mortgage, the interest rate remains constant throughout the life of the loan, typically spanning 30 years. This means that regardless of fluctuations in the broader interest rate market, the homeowner’s monthly mortgage payments will remain unchanged. 

 

Fixed-rate mortgages are known for providing long-term financial stability and are a suitable option for buyers who plan to stay in their homes for an extended period. 

 

Pros: 

  • Predictable monthly payments. 
  • Protection against interest rate increases. 
  • Ideal for long-term homeownership. 

 

Cons: 

  • Initial interest rates may be slightly higher compared to initial rates of ARMs. 
  • Less flexible in terms of adjusting to potential decreases in interest rates. 

 

Adjustable-Rate Mortgage (ARM):  Flexibility and Risk 

 

An adjustable-rate mortgage (ARM) offers a different structure compared to a fixed-rate mortgage.  In an ARM, the interest rate is fixed for an initial period, typically ranging from three to ten years.  After the initial period, the interest rate adjusts periodically, usually annually, based on a specific index and margin.  This means that the homeowner’s monthly payments can fluctuate, potentially resulting in lower payments during periods of low interest rates but can result in higher payments when rates increase. 

 

Pros: 

  • Lower initial interest rates, which can lead to lower initial monthly payments. 
  • Potential for lower overall interest payments if rates remain stable or decrease. 
  • Suited for short-term homeownership or those who anticipate financial changes in the near future. 

 

Cons: 

  • Uncertainty in future monthly payments due to potential interest rate fluctuations. 
  • Risk of higher payments if interest rates rise significantly. 
  • Can be challenging to budget for fluctuating payments. 

 

It’s not a secret that the rates have risen over the past little while.  As of the writing of this article, the rates are hovering at 7.25 percent, yet at the same time the buyers are definitely out there giving offers. 

 

There are many homes that we have in the market and almost every home has some offer on it.  I’m not saying that it’s an offer the sellers want to take right away, but there are definitely offers that are coming in and buyers are out there looking and opting for the ARM in order to combat the high interest rates.  They are looking into ARMs as a short-term solution because the time is right for them to buy a house. 

 

Obviously, I’m not here to give any specific advice.  You have to discuss with your financial planner and mortgage broker which type of mortgage works best for you and your family, but this is something that people have been looking into and it has been working out for many. 

Historical 30-Year Fixed-Mortgage Rates 

 

As of this writing, the current mortgage rates are 7.54 percent for a 30-year fixed mortgage and 6.89 percent for a 15-year mortgage. 

 

Below is a diagram from ValuePenguin showing the rates from 1971-2022, a span of 51 years.