At The Peoples Bank, we want you to be in control when getting an online mortgage so it’s important to understand the mortgage options available to you.
A fixed rate mortgage is the go to for nearly all homebuyers and refinancers. There is good reason for its popularity. The interest rate and monthly payments will remain the same throughout the lifetime of the loan. This is appealing for buyers looking for stability.
30-year fixed rate mortgages lock in your interest rate and monthly payment for all 30 years. The slightly less popular 15-year is conceptually the same but calls for payment length in half the time, so the monthly payment will be higher. Another perk, you save some serious cash in saved interest over the lifetime of the loan.
Adjustable rate (ARM)
An adjustable rate mortgage has an interest rate that can increase or decrease. This can be helpful for a buyer borrowing during a period of low interest rates. ARM rates are tied to the interest rate of a specific financial index like Treasury bills, certificates of deposit, the LIBOR index, etc. When that index goes up or down, your interest rate follows.
The main draw is that an introductory ARM interest rate is typically lower than a fixed rate, allowing borrowers to buy more house than they could with a fixed rate mortgage.
The most popular adjustable rate mortgage is the 5/1 ARM. This rate lasts for 5 years, and may change every year after.
ARMs are not as simple as fixed rate loans. You may see an offer listed as a 5/1 ARM with 3/2/6 cap, interest rate determined by the LIBOR plus 2%.
This is an adjustable rate mortgage with a fixed rate for 5 years followed by a rate adjustment every 1 year. The first adjustment is capped at 3%, while later adjustments are restricted to a change of 2% or less. The lifetime interest rate cap for this loan is 6% over your initial rate, never more. There is a 2% margin, meaning 2% is added to the LIBOR rate.
Fixed vs. Adjustable
It depends. A 5/1 ARM may save thousands over the first five years, but those savings could be wiped out by a rate adjustment. If you plan to sell or refinance well within the introductory period, and can make higher payments if needed, an adjustable rate mortgage is a great option.
If you plan to put down some roots, sticking to a more conventional fixed rate is the way to go.
Lenders want to give choices. Every borrower has a unique situation. This can make the decision process a little tricky.
For fixed rate mortgages, you could choose 10, 15, 20, or 30 years to pay back your loan. You could go with any of these, but if you want a standard mortgage, 15 or 30 is ideal.
Remember that different loan terms will result in a very different loan experience. A 30-year loan will have a lower payment paired with a higher interest rate, costing more of the life of the loan. On the flip side, a 15-year loan will have a higher payment paired with a lower interest rate, saving you money over time.
What if you choose a 30-year fixed rate loan, but are not happy with the interest rate? You can change it. Discount points are another option to consider. If you have upfront cash, you can buy down your interest rate.
The cost of each point is equal to 1% of your loan size. A percentage point of your loan size is usually around 0.25% off your interest rate.
Will it be worth the cost? There is generally a break-even point five or more years into your loan where buying down your rate starts saving you significant interest. If you sell or refinance before then, it will be less beneficial.
You don’t have many options when it comes to interest rates. A lot of this is decided for you based on your credit score and borrower profile.
15 and 30-year fixed rate loan terms will have different rates, the 15-year option having the lower rate. The choice here depends on whether you want or need a lower monthly payment, with some consideration for how much interest the longer loan will cost you.
Adjustable rate mortgages are also something to consider. They can be risky and are not for everyone. Introductory rates are typically much lower than either 15 or 30-year fixed loans. If you’re savvy with finances and don’t plan to keep the mortgage past the first adjustment, this could be an option for you.
The amount you put down on your new home has a big impact. It affects your interest rate, monthly payment, and even what loan programs you’re eligible for. Down payments range from as little as 3.5% to more than 20%, with most lenders ideally looking for 10-20%.
A popular low downpayment loan is with the Federal Housing Administration (FHA), which allows for as little as 3.5% down. The main downfall with an FHA loan is mandatory insurance premiums that protect the lender in the event you default on your loan.
The Learning Center is an educational tool and the content is for information purposes only and is not intended to provide investment, legal, tax, or accounting advice, nor is it intended to indicate the availability or applicability of any The Peoples Bank product or service to your unique circumstances. All examples are hypothetical and for illustrative purposes. Although we have obtained content from sources deemed to be reliable, The Peoples Bank and its affiliates are not responsible for any content provided by unaffiliated third parties. You may wish to consult an appropriate advisor about your unique situation. The applicability of this information to your circumstances is not guaranteed. You should obtain personal advice from qualified professionals.