When you are comparing mortgages, one of the first questions you will find yourself asking is whether you want a fixed-rate loan or an adjustable-rate loan. Fixed-rate loans have a fixed APR throughout the life of the loan. This APR tends to be higher than the initial APR offered for many adjustable-rate loans. However, after an initial period, the adjustable-rate loan's APR may increase, giving you a higher APR than the fixed-rate loan initially offered. When deciding between the two, you should ask yourself these four questions.
How Long Will I Have This Mortgage?
Generally, the longer you have a loan, the riskier it is to accept an adjustable-rate loan. This is because the APR can increase multiple times throughout the life of the loan. However, if you have a short-term loan and the initial fixed-period of an adjustable-rate loan covers a significant portion of that time, an adjustable-rate loan may not be as risky. For example, if you are looking for a 15-year loan with an initial interest period of 5 years, then it is unlikely that you will end up with an overly high interest rate. However, if you have a 30 year loan with only 2 years of a fixed interest rate, there is a chance that the APR will increase significantly before you pay off the loan.
Will I Be Able to Lock In a Fixed Rate Later?
Many lending institutions allow you to switch from an adjustable-rate loan to a fixed-rate loan later in the life of the loan for an additional fee. Alternatively, you may be able to refinance with a fixed-rate loan. Ask about these options before you agree to an adjustable-rate loan.
Is There a Cap On an Adjustable Rate Mortgage?
Most adjustable-rate loans have various caps on the amount that the interest rate can be raised and how often it can be raised. You want to look for loans that can only be raised a small amount each period and do not have several periods over the life of the loan.
Can I Handle Financial Surprises?
If money is tight and you want to be sure that you will be able to afford your loan payments, a fixed-rate loan can give you peace of mind as to your monthly payments. Since an adjustable-rate loan changes over time, it is not a good option for people who do not have financial flexibility.
These questions should help you determine if an adjustable-rate loan is worth the lower initial interest rate and whether you can afford it over time.
For mortgage loans, contact a company such as TruPartner Credit Union.
Share11 May 2016
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