Buying a home is a significant accomplishment and can be a very exciting a time. As you’re separating your wants from your needs and finding your perfect home in Kansas or Missouri, get to know your mortgage options.
Lenders like Mainstreet Credit Union offer two basic types of mortgages: fixed-rate mortgages and adjustable-rate mortgages. While you will likely find different loan options within those two categories, your first decision is whether to select a mortgage with an interest rate that never changes or a mortgage with a rate that starts low but can vary throughout the loan term.
Fixed-Rate Mortgages: Predictability
When it comes to budgeting, you know what you’ll get with a fixed-rate mortgage.
Fixed Interest Rate: A fixed-rate mortgage offers an interest rate that will never change over the term of your loan. If you’re borrowing during a time of low interest rates, this can be valuable because you’ll pay less money in interest.
Predictable Payments: With a fixed-rate mortgage, your monthly total, including principal and interest, will not change. However, you’ll likely see an increase in your monthly payments if you use your mortgage to pay taxes, since most municipalities raise tax rates every year. Due to amortization, more of your payment will go toward interest in the first few years of your mortgage. In the latter stages of your mortgage term, more of your monthly payment will go toward principal.
No Surprises: Because your rate is fixed, it’s easier to figure out your monthly allocation for housing. But if you’re borrowing during a time of high interest rates, your mortgage payments might be less affordable than other options.
Term: Another factor to consider with a fixed-rate mortgage is the term of the loan. Thirty years is the most popular option because it offers the lowest monthly payment. However, with a 30-year term, you’ll pay more over the life of the mortgage than you would with a 15-year or 20-year term, since you’re paying 10 or 15 additional years of interest.
Fixed-rate mortgages are best if…
You want to know what you’re going to pay for your mortgage every month
You plan to live in the home for 10 or more years
You’re borrowing during a period of low interest rates
Adjustable-Rate Mortgages: Flexibility
An adjustable-rate mortgage (ARM) offers attractive features for some borrowers.
Fluctuating Rate: The interest rate for adjustable-rate mortgages will change frequently over the life of the loan. Typically, rates are fixed for the first few years (usually one, three or five years) before they begin to change. These changes depend on how your mortgage is structured. In the early stages of an ARM, your interest is often lower than the rates offered on comparable fixed-rate mortgages. Depending on market conditions, your interest rate can either increase or decrease. It’s uncertain, which is why it’s important to determine whether you can afford larger monthly payments if your mortgage adjusts upward.
Larger Loan: Along with lower initial payments, you can also qualify for a larger loan with an adjustable-rate mortgage because you’re not paying as much in interest at the start. If interest rates continue to decrease, you’ll enjoy lower mortgage payments and lower rates without refinancing your mortgage.
Interest Rate Ceiling: Fortunately, your ARM’s rate increases are capped. This ceiling varies by lender. Your interest rate will adjust based on the activity of a particular index, such as the Secured Overnight Financing Rate (SOFR) or U.S. Treasury rates. These caps limit how much your rate can rise at each adjustment and over the life of the loan. A common structure is 2/2/5, meaning the rate can rise no more than 2% at the first adjustment, 2% at each adjustment after that, and 5% above your starting rate over the life of the loan.
Adjustable-rate mortgages work best if…
You want an initial rate that may start below current rates for comparable fixed mortgages
You plan to live in your house for approximately five years or fewer (or before the fixed-rate period ends)
Current interest rates are relatively low, and you believe they could continue to decline
Can You Switch From an ARM to a Fixed-Rate Mortgage?
If you want more predictable payments, it’s possible to switch from an adjustable-rate mortgage to a fixed-rate mortgage. Many borrowers choose to do this before their fixed-rate period ends and their payments have a chance to rise.
Refinancing does come with its own closing costs, so it's worth comparing the long-term savings against the upfront expense. A Mainstreet Credit Union home loan professional can help you weigh your refinancing options and decide whether the timing makes sense for you.
Buying a home in Kansas City, MO or Kansas is an exciting step. Use our mortgage calculator to compare potential payments with both mortgage types and be sure to select a mortgage that will work for you now and in the future. Contact a Mainstreet Credit Union home loan professional today to learn more or get pre-qualified for a home loan.
