A key factor in deciding between these two types of mortgages is the current interest rate environment.
A key factor in deciding between these two types of mortgages is the current interest rate environment. If rates are relatively low, a fixed-rate mortgage may be the better option.
If rates are relatively high, an adjustable rate mortgage (or ARM) may make sense because its lower initial interest rate can lead to a lower monthly payment for a specific time period – usually 5, 7, or 10 years – before the interest rate can be changed.
Another important consideration is whether you plan to stay in your home for a long period of time (more than 10 years.) If so, you may want to consider a fixed-rate mortgage to provide the peace of mind that your rate will remain the same for the life of your loan.
On the other hand, if you don’t plan on being in your home very long, an ARM can be a smart play because it often offers a lower monthly mortgage payment than a fixed-rate mortgage. It can also come with some long-term risk, especially if your payment adjusts upward based on rising interest rates. Thankfully, there is some protection offered on ARMs based on Periodic and Lifetime Caps on interest rate increases. These provide limits on how much the rate can change at a single adjustment, as well as over the life of the loan.
of a 7/1 ARM and a Conventional Loan, to compare total costs over the life of the loan.
3.25% 7/1 ARM
3.75% Fixed
Monthly Difference
Total Difference During Timeframe
$1,088
$1,158
-$4,186
$1,320
$162
-$2,238
$1,567
$409
$2,667
$1,693
$535
$9,092
A rate lock can be a really smart play during the late innings of the mortgage application process. It guarantees a certain interest rate, at a certain price, for a specific amount of time. A lock can give you peace of mind if rates rise during your loan application process.
It usually makes the most sense to lock in your rate once you sign a purchase agreement. Typically, that’s 30-60 days prior to closing. Think of your rate lock as yet another way to sprint toward home.
There’s no reason to be concerned in the least. It’s very common, and actually necessary for the industry, for mortgage loans to be sold to organizations other than the bank that originated the loan. The fact that your loan is sold has nothing to do with you or your credit profile, and does not reflect upon you at all.
The financial details and terms of your original loan, as disclosed on the documents you signed, will not change as a result of the loan being sold. However, you may need to change the address to where you are sending your monthly payments if the servicing right of the loan is sold along with the balance.
