There are benefits to every loan option.
We’ll help you understand which home loan is right for you.
Depending on your goals and financial situation, you’ll have several different loan options to choose from. We’ll help you understand the differences between them so you can choose a home loan that’s right for you.
Types of Loans
Most loans fall into one of two categories: fixed-rate and adjustable-rate.
A fixed-rate mortgage term is generally 15, 20, or 30 years long. The loan’s interest rate and monthly principal and interest payment amount remain constant for the life of your loan.
With a fixed-rate mortgage, your monthly principal and interest payments will be predictable for the entire life of your loan—you won’t have to worry about mortgage rates rising. You’ll be able to spread your payments out to lower your monthly principal and interest payment amount.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage generally offers a lower rate than a fixed-rate loan for the first five to seven years of your term. After that, your rate will change with the market index.
Early on with your ARM, your interest rate will be lower than it would be with a fixed-rate loan.
This saves you money initially, and may help you qualify for a more expensive home. However, your payments will increase quite a bit when interest rates are rising. And as the index goes up or down, your payments will also change at each scheduled adjustment date. Note: In most cases, there are “rate caps” to limit the amount your interest rate can go up or down.
Deciding Which Home Loan Is Right for You
Deciding between a fixed-rate and adjustable-rate loan depends on two key factors:
1) How long do you plan to own your home?
- Planning to stay put. If you plan to be in your home for more than seven years, you may want to consider a fixed-rate mortgage. A fixed-rate mortgage will offer you predictable payments and long-term protection against rising mortgage interest rates.
- Planning to sell. If you plan to be in your home for seven years or less, an adjustable-rate mortgage could be an attractive option. Keep in mind that should you stay in your home longer than you originally planned, your monthly payments may go up when your interest rate is adjusted if mortgage interest rates are rising.
2) What are the current interest rates?
- Depending on current interest rate conditions, the difference in the monthly payment between a fixed-rate loan and an adjustable-rate loan could be very small or quite large. There are many different variables involved, so use a rate quote calculator to figure out which type of loan makes the most sense for you. You can also contact a Chase Mortgage Banker with questions. We can help you consider all of your options and choose the right loan for you.
Additional Loan Considerations
In addition to the traditional fixed-rate and ARM loans, we offer a variety of other loan options, like programs for low-income families, veterans or union members. As you shop around for loans, make sure to ask if you qualify for any special loan programs. Here are a few things to consider:
- FHA/VA loans. The Federal Housing Administration and the Veterans Administration offer loan programs with low down payment requirements. The FHA allows as little as a 3.5% down payment and there may be no down payment required for VA loans.
- Low down payment loans. Some lenders also offer low down payment loans. You may be able to put as little as 5% down.
- Alternative loan terms. Most mortgage loans are 30-year loans. However, there are also 10, 15-, 20, 25- and 40-year options. This saves you money initially, and may help you qualify for a more expensive home. However, your payments will increase quite a bit when interest rates are rising. And as the index goes up or down, your payments will also change at each scheduled adjustment date. Note: In most cases, there are “rate caps” to limit the amount your interest rate can go up or down.
- Ways to reduce your rate. You can reduce your interest rate when you “pay for points” to lower your monthly payment. One point costs 1% of your loan amount and can reduce your interest rate by about 0.25%. Learn about when it makes sense to pay discount points.
Case Study: Adjustable-Rate Vs. Fixed-Rate Loans
To illustrate the different advantages of fixed-rate and adjustable-rate mortgage loans, we’ve created some imaginary homebuyers: Mr. & Mrs. Fixed Rate and Ms. Adjustable Rate. Which homebuyer’s lifestyle choices, financial situation and life goals look most like yours? That may help you decide which loan type is right for you.
Meet Mr. & Mrs. Fixed Rate
Jack and Mercedes are a couple looking to buy a house. While they don’t have children yet, they plan to in the future. They both have stable jobs, but they don’t expect to make a lot more money in the future than they make now.
They find a nice home in a decent neighborhood. The neighborhood is safe and the schools are good, and Jack can fix the place up. They choose a 30-year fixed-rate mortgage because they know exactly how much they’ll pay every month. Two years later, they have their first child. Three years later, they have another. Mercedes stops working for a while, but they reduce their budget and manage to stay afloat. When the kids get to be school age, Mercedes goes back to work.
At first, their house loses some value, but they’re not planning to move soon. After 10 years, it’s actually worth more than they bought it for. After 30 years, with their kids out of the house, they’ve made their last payment. Now, as they think about retirement, their monthly housing costs are only taxes and insurance, plus upkeep, so they can get by on less. They can sell the house if they want, or leave it to their kids.
Meet Ms. Adjustable Rate
Kathy is a physician who is also in the market for a house. She wants to buy a house because it can be a smart investment, and she enjoys redecorating. She has a successful career in medicine, and chances are that she’ll have to move, possibly more than once, as her career advances. Chances are also good that she’ll make significantly more money in 10 years than she does now.
After three years, a promotion comes—if she’ll move out of state to a new hospital in Minneapolis. Kathy doesn’t have to think twice and puts the house on the market. While the house lost a bit of value due to the economy, all the work she did on the kitchen balances that out, and she’s able to get out without losing too much money. She moves to Minneapolis and rents for a while. A bump in salary comes with the new position. Eventually, she and her partner decide to settle down and buy a house together. And what kind of loan do they get? You guessed it: a 30-year fixed.