As you prepare to make an offer, it's important to think about the type of mortgage product you want to lock in when an offer is accepted. The information below gives you a quick look at the differences between the most common mortgage products and will help you answer these important questions:
What is the difference between an adjustable rate mortgage (ARM) and a fixed rate mortgage?
How does an ARM mortgage work?
Is an ARM mortgage right for me?
Fully Amortizing Mortgages
Mortgages can be complicated to understand. We’re here to help you make sense of the most common types of mortgage products that exist!
There are two major varieties of fully amortizing mortgages: fixed rate mortgages and adjustable rate mortgages (or ARMs). When a mortgage is fully amortizing, it means that at the end of your loan period, you are 100% done paying off your mortgage.
Fixed Rate Mortgage
- What is it? In a fixed rate mortgage, your interest rate is the same for the entire length of the loan, so you know exactly what your monthly payments will be each month.
- What’s an example? 30-year fixed rate mortgage
- What’s the interest rate? The interest rate is based on the current market interest rate at the time you get the mortgage. The interest rate never changes. During your pre-approval process, the lender will tell you the interest rate for which you are approved. Many factors, such as credit, go into determining your interest rate.
- What’s the benefit? You have stability in your budget since you know exactly what your payments will be each month.
- What is it? In an adjustable rate mortgage (ARM), your interest rate is fixed for an initial period and then changes on a fixed period after that.
- What’s an example? 7/1 adjustable rate mortgage
- What’s the interest rate? The initial interest rate on an ARM is typically lower than the interest rate on a fixed-rate mortgage. After the fixed period, the interest rate can change up or down based on the current market interest rate. For example, in a 7/1 ARM, the 7 represents the fact that your interest rate is fixed for the first 7 years. The 1 represents that after the initial period your interest rate changes every year thereafter. There are also caps on how much interest can increase or decrease from period to period, as well as a maximum interest rate you will ever pay.
- What’s the benefit? Your initial interest rate is lower. Over the life of a mortgage, homeowners may actually pay less overall interest using an ARM than a fixed rate mortgage. ARMs can be a good fit for the homebuyers who aren’t looking to stay in their home for 30 years, and who can handle the risk of their monthly payment changing.
Your loan officer will be your most helpful resource in understanding what mortgage products will be best for you.