With the rate change around the corner, If buying a home has been on your mind, you aren’t alone. Based on our Credit coaching calls with our Tomo members, the number one reason why they want to build credit is “to buy my first house”.
Homeownership is a hot topic for GenZ and millennials and people are not necessarily waiting till marriage. Reports show single women have outpaced single males in homeownership since 1981 – and more and more women have taken the plunge into homeownership in the past couple of decades.
One critical decision you’ll have to make when you’re about to buy a home is whether to get a fixed-rate mortgage or an adjustable-rate mortgage (ARM). Let’s look at some of the differences and similarities between the two.
ARMs
Adjustable-rate mortgages are typically 30-year loans, meaning you’ll pay back the money you borrowed over 30 years, with a rate that is fixed for an initial period. An ARM interest rate changes after the fixed period expires.
At the beginning of your loan, you’ll get an introductory rate that’s typically lower than average fixed-mortgage interest rates. The low rate will stay the same for a certain period of time, with the common types being 7 and 10 years. After the fixed-rate period ends, your interest rate will adjust up or down based on an index, like the London Interbank Offered Rate (LIBOR).
Mortgage lenders use a special series of number structures to tell you about your adjustable rate loan and interest periods. For example, another common type of ARM is a 5/1 loan. The first number tells you how long the fixed interest rate lasts. The second number tells you how often your interest rate can change. In this case, it changes yearly, but if you see a “6” in place of the “1,” then the rate changes every 6 months once the fixed period is over.
Fixed-Rate Mortgages
A fixed-rate mortgage has the same interest rate throughout the life of the loan. Your monthly payment of principal and interest won’t change, though your overall payment can, depending on how your taxes and homeowners insurance fluctuate.
A fixed-rate mortgage loan is the most popular type of financing because it’s the most predictable. However, that predictability, or certainty, of a fixed rate comes with a cost. This cost is what makes ARMs attractive to many people who can save a lot of money with a loan that’s not fixed for the full term of the mortgage.