Buying a Southern NH Home for Sale – Fixed or Adjustable-Rate Mortgages?

As soon as you decide to buy a Southern New Hampshire home for sale you’ll be looking at loans. You’ll see balloon loans, fixed-rate mortgages, adjustable-rate mortgages and a few others. Fixed and adjustable-rate mortgages are the most common, but why and what’s the difference?

The biggest differences are in cost and security. Fixed-rate mortgages can cost more, but have a measure of security. Adjustable rate mortgages, or ARMs, can cost less, but have less security.

As with all things, ARMs and fixed-rate mortgages have pros and cons. Here are just a few:

The Pros and Cons of ARMs
When you buy a Southern New Hampshire home for sale with an ARM, your payments will be lower than a loan with a fixed-rate mortgage. Because the payments are lower, you can afford to buy a more expensive home. As well, ARM payments are based, in part, on interest rates. When interest rates fall, your payments go down.  (It's not an immediate effect: the payments are recalculated at regularly scheduled intervals predetermined by the loan paperwork - could be every 2 years or 5 years, etc.)

The cons of adjustable-rate mortgages are just as big as the pros. For example, because they are based on whatever the current interest rate is, you can end up having a higher mortgage payment if interest rates rise over the term of your loan. If rates rise sharply and the cap on how much the rate can rise per adjustment is set high, a 6% ARM can turn into an 11% ARM within four years. Another negative is that because ARMs aren’t easy to understand, borrowers can be confused, which makes it easier for shady mortgage companies to trap them in a bad deal.

The Pros and Cons of Fixed-Rate Mortgages
With fixed-rate mortgages, your payment stays the same whether interest rates rise or drop. This makes budgeting easier and is a plus when interest rates rise. However, homeowners with fixed-rate mortgages have to refinance if they want to take advantage of dropping interest rates.

Likewise, because the payment never changes, fixed-rate mortgages cost more. Mortgage lenders don’t offer rate breaks on fixed-rate mortgages. The other con, which may be a big one to some, is that fixed-rate mortgages don’t vary from lender to lender. With adjustable-rate mortgages, the lenders are flexible and can customize the loan to your needs; this isn’t true with fixed-rate mortgages.

The biggest question to ask yourself when considering an ARM or fixed-rate mortgage is, “Can I afford my home if interest rates spike?” You could start paying $875 a month, and, with a quick rate rise, end up paying $1,514 within four years.

My Advice
With interest rates as low as they are right now, I see no value in getting an adjustable rate mortgage.  As long as interest rates are in the 6% and under range, I would ignore the adjustable rate option and stick with the security of the fixed rate mortgage. 

When considering which type of home loan to use for buying a Southern New Hampshire home for sale, don’t be afraid to ask a lender to explain the pros and cons of each type in depth. Don’t ever consider signing the contract if you aren’t sure what you’re signing.

If you’re looking for a great home to buy, I can help. Call me at 603-821-1134 or email me at Dave@DaveHeeter.com for more information.