Fixed Rate or Adjustable Rate Loan – What’s the Advantage to Either?

Fixed rate home loan or adjustable rate home loan photoLike many other places, the mid-Missouri housing market displays quite a bit of variance — prices in one town may be quite different than another city just 20 or 30 miles away. Generally, the market in Columbia is steady, but it depends on the specific price range in question.

According to the Columbia Board of Realtors, 2017 saw a median single-family home price of $185,750. In the first quarter of 2018, that number rose to around $195,000. Homes priced at less than $225,000 are moving fairly quickly, and Realtors report that sellers typically receive at or above their asking price because of the demand for homes in this price range.

Outside of Columbia, prices tend to decrease slightly. Ashland, in particular, is drawing new home buyers. The flexibility of this halfway point between Columbia and Jefferson City allows residents to work in either city, and the booming real estate market is driving new construction. Situations are similar in surrounding towns such as Fulton, Millersburg, and Hallsville.

As you’re looking for a home that meets your needs, it’s a good idea to be educating yourself about your financing options as well. Many buyers assume that most loans are created equal, but fortunately, that isn’t the case. There are a variety of different types of loans available to meet a wide range of needs.

Finding the Magic Mortgage

After years at rock bottom levels, interest rates are slowly beginning to increase. Over the past few months, they’ve gone up by about 0.2 percent, but don’t let that scare you from buying a home. Rates are still under 5 percent and historically low — but because they’re expected to keep rising, they might not be this low for a long time.

Adjustable rate mortgages (ARMs) are loans that have a set interest rate for a period of time, after which it will adjust with the market. A 3/1 ARM, for instance, means that the rate will be fixed for the first three years, after which it will adjust each year for the life of the loan. ARM rates are usually tied to a published index like the one-year Treasury Rate or LIBOR, and they may have caps set to limit how much they increase, both in a single year and during the life of the loan.

Fixed rate loans, such as a 30-year fixed, have a set interest rate for the term of the loan. Common terms for fixed rate loans are 15, 20, and 30 years. Because rates are expected to increase, locking in a low rate with a fixed rate loan can give the buyer some peace of mind. Fixed rate loans generally have more stringent qualifications that aren’t always based on credit history — in fact, some perfectly desirable homes might have an odd room or something out of the ordinary which can affect the appraisal and prevent them from meeting the criteria for a fixed rate loan.

Timing Is Everything

Another factor that can influence a loan decision is your timeline. If you move frequently for work or expect you’ll outgrow your home in less than five years, an ARM might make the most sense because you won’t be in a house for much longer than the initial term of a loan, so you can save some money by going with a reduced rate.

ARMs are not as popular as fixed rate loans, accounting for just 6.7 percent of all mortgage loans in April. While this number may seem low, it’s actually the highest number of ARMs since October 2014. Most buyers opt for a fixed rate, and if you don’t have any immediate plans for moving, a fixed rate loan is probably the safest bet. What’s interesting, though, is that regardless of loan type, most home loans are paid off in seven years because the borrower bought a different home or refinanced their loan.

While our overview of loan options has mostly focused on interest rates, people often overlook the length of the loan. A shorter term, such as a 15-year loan, will generally have a lower interest rate, and because the home is paid off quicker, you’ll pay less interest over the life of the loan. The challenge is keeping up with higher monthly payments, but depending on your financial situation, this could be the most cost-effective solution for you.

Wherever you’re looking to settle down, a home is a big purchase, and finding a home loan partner that fits your lifestyle and budget is always important. Different financial situations are almost as unique as fingerprints, which is why there are many different types of loans available. The right lender can walk you through all your options so that you’re confident the one you pick makes the most sense for your financial future.

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