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What is the Difference Between a Fixed-rate and an Adjustable-rate Mortgage?

 Wednesday, December 4    CCCU
What is the Difference Between a Fixed-rate and an Adjustable-rate Mortgage?

What is the Difference Between a Fixed-rate and an Adjustable-rate Mortgage?


Consolidated Community Credit Union is here to guide you through the differences between an Adjustable Rate Mortgage (ARM) and a fixed rate mortgage so you can make the best decision when it comes to Portland home buying. Read on to know which home financing option is right for you!

Whether you’re a first-time home buyer or are already in the Portland housing market, navigating your residential real estate options can be a complicated and confusing process. Not only do you need to choose a trusted lender, but you also have to figure out which type of mortgage is right for you.
 
While there are several types of mortgages offered by credit unions and banks, most people opt for a fixed-rate mortgage when buying a home. However, that doesn’t necessarily mean it’s the right choice for you. An adjustable-rate mortgage may come with a lower initial interest rate or a term that’s more suitable for your needs. So, what’s better –– a fixed or an adjustable-rate mortgage? Keep reading to learn about different home financing options to learn how to decide which mortgage loan is best for you.


Types of mortgages offered to Oregon home buyers


First things first: What’s an adjustable-rate mortgage? And what’s a fixed-rate mortgage? For all mortgages, the interest rate will be applied to the outstanding balance of your loan, but depending on the type of loan you choose, how it accrues may or may not remain constant. This means you need to consider how your income will either grow or stay the same.


What’s an Adjustable-rate mortgage?


With an adjustable-rate mortgage (ARM), your interest rate will vary throughout the life of your loan. After an initial period, the rate will reset periodically at preset benchmarks (either annually or sometimes monthly). The new adjusted rate (referred to as an ARM margin) is based on the index plus an additional spread. We’re always happy to discuss this option at our Portland credit union if you think this is the right option for you.


What’s a fixed-rate mortgage?


Conversely, with a fixed-rate mortgage, you will keep the same interest rate throughout the entire life of your loan. This means that your total monthly payment (including principal and interest) will remain the same unless your property taxes or homeowners insurance changes. Knowing how much your mortgage payments will be can be both comforting and useful for some homeowners. It might make budgeting easier, and if your income goes up throughout the years, your adjusted cost of living will decrease with steady monthly payments.
 
As we mentioned above, fixed-rate loans are one of the more popular types of mortgages for qualifying buyers in Oregon or Washington, but it’s not a one-size-fits-all option. Fixed-rate mortgages typically have higher starting interest rates than ARMs, which may impact how much home you can afford.


Is an ARM mortgage right for me? How about a fixed-rate mortgage?


A lot of our Portland credit union members ask us this question. An adjustable-rate mortgage offers lower initial interest rates. This means that lenders can take a lower payment into account when they qualify you for a loan, which may allow you to afford a more expensive home than you would with a fixed-rate mortgage. If you go the fixed-rate route, you can always refinance if your interest rate drops, but another benefit of an ARM is that homeowners don’t need to refinance when interest rates fall –– instead, they can sit back and watch their monthly payments adjust with the market.
 
Keep in mind that with this type of mortgage, you will also be at risk for significant increases in interest rates and monthly payments. While adjustable-rate mortgages begin with lower rates than fixed-rate loans, they can always reset at higher points throughout the life of the loan. An ARM can be cost-effective for those who don’t plan to live in a home for very long or those who predict their income to increase over time, whereas a fix-rate loan tends to be beneficial for people who intend to stay where they are for several years or even decades.

 

Get a mortgage in Portland from CCCU


Now that you’re familiar with the difference between a fixed-rate and an ARM loan, you’ll be able to make an informed decision about which type of home loan to choose. If there’s a good chance that your income will increase in the next decade or if you plan to move within a few years, an adjustable-rate mortgage could be the right choice. Also, if you’re a first-time home buyer, an ARM will increase the amount of house you can afford. However, if you’ve settled into your career, wish to keep your family in the same neighborhood, and intend to live in a home for an extended period, then fixed-rate mortgage may be the better option.
 
Buying a home is a major life milestone, and it comes with several crucial decisions that shouldn’t be taken lightly. Be sure to weigh your options, and don’t be afraid to ask your lender lots of questions before committing to anything. Check out the mortgage tools and loan programs from Consolidated Community Credit Union, and speak to a local lender to get a mortgage in Portland that works for your unique needs and budget.

 




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