When looking to purchase a home – whether as a first-time homebuyer or looking for a new place to call home – one of the most daunting aspects of the home buying process is qualifying for a home loan or mortgage. This isn’t helped by the fact there are so many different home loans to choose from like the Veterans Affairs (VA) loan, the Federal Housing Administration (FHA) loan, and United States Department of Agriculture (USDA) loans, all of which are offered by the US federal government. The other mortgage types are conventional loans, conforming and non-conforming loans, amortizing and non-amortizing loans, hybrid, interest-only, and payment-option loans.
The good news for all homebuyers is that all mortgage loans fall under one of two categories: fixed-rate and adjustable-rate mortgage (ARM). Fixed-rate loans are the most popular due to having a fixed interest rate, which is also the only rate available on all government-sponsored loans. Other fixed-rate loans include conventional, conforming and non-conforming, amortizing and non-amortizing loans. The only loan types that don’t follow the fixed interest rate model are hybrid, interest-only, and payment-option loans as they are all adjustable interest rate loans.
Now that we know what some of the different loans are and that they all fall under one of two categories, what are the other differences between them? What are the benefits and disadvantages of fixed-rate and adjustable-rate mortgages? These are all important questions all homebuyers must answer in order to decide which home loan is best for them. Fortunately, for homebuyers looking to purchase a home in Florida, Maryland, and Virginia, MCS Mortgage is here to provide answers to those important questions!
What Are the Characteristics of a Fixed-Rate Mortgage?
The major difference between fixed-rate and adjustable-rate mortgages is the interest rate. Fixed-rate mortgages are pretty self-explanatory: the interest rate is fixed and never changes for the full loan term. For homebuyers, this means consistent, predictable monthly payments and a lower interest rate as determined by housing market trends.
Another major difference between fixed-rate and adjustable-rate mortgages is that some fixed-rate loans will have different credit score requirements than others. This is most notable with the FHA loan, which has a lower minimum requirement of 580 to qualify. Most other fixed-rate loans – like the conventional loan – require a minimum credit score of 620 to qualify. Lastly, to qualify for a fixed-rate loan, a borrower is required to have a debt-to-income (DTI) ratio lower than 43%.
What Are the Characteristics of an Adjustable-Rate Mortgage (ARM)?
In the case of adjustable-rate mortgages (ARMs), as one would expect, the interest rate changes over a period of time and on a pre-determined adjustment schedule. The adjustment schedule is determined by the term of the loan, which also determines the frequency of adjustment. As such, the interest rate on an ARM loan can adjust monthly, quarterly, once a year, or even once every 3 to 5 years.
Another way an ARM loan differs from a fixed-rate loan is that the ARM loan will have a fixed-rate period at the beginning of the repayment schedule in which monthly payments are lower. The reason payments are lower is because the interest rate is lower than the market rate during this time. After the adjustment period begins, monthly payments will either increase or decrease depending on where the market rates are trending.
To qualify for an ARM loan, a minimum credit score of 620 is needed, though having a credit score of 740 or higher is preferred by many lenders. Another requirement that determines qualification for an ARM loan is a debt-to-income (DTI) lower than 51%.
What Are the Benefits and Disadvantages of Fix-Rate Mortgages?
Fixed-rate mortgages offer many benefits to homebuyers who have low to moderate-income and other financial goals. These benefits include:
- Consistent, predictable monthly payments
- Easier budgeting for managing other expenses
- Less complex and non-flexible to change
- Ideal for homeowners who don’t plan to relocate
There are also some disadvantages to fixed-rate loans, such as:
- Interest rates staying the same even when market rates drop
- Potentially paying more in interest if the loan was secured during a time when market rates were high without refinancing.
What Are the Benefits and Disadvantages of Adjustable-Rate Mortgages?
Adjustable-rate mortgages (ARMs) offer the most benefits to homebuyers who can afford to pay off their mortgages faster. These benefits include:
- Lower monthly payments during the fixed-rate period
- Can take advantage of dropping market rates, which can help save money
- Ideal for homeowners who expect to relocate
There are also disadvantages to ARMs, especially if a homeowner’s financial situation changes. These include :
- Could potentially make higher monthly payments during the adjustment period
- More flexibility on the side of the lender to decide adjustment indexes, caps margins, and other things
MCS Mortgage is a licensed mortgage broker that services the states of Florida, Maryland, and Virginia. In Maryland, MCS services the areas of Annapolis, Baltimore, Bethesda, Columbia, Towson, and Upper Marlboro. In Virginia, MCS services the areas of Annandale, Alexandria, Arlington, Catonsville, Falls Church, Fredricksburg, Fairfax, Fairfield County, Gainesville, Loudoun County, Manassas, Prince William County.
To find out if a fixed-rate or adjustment-rate mortgage is right for you, contact MCS Mortgage by phone at 833-415-LOAN or by email at Hello@MCSMLS.com.