Plan To Get A Mortgage Soon, But First Get Your Financial House In Order
You'll probably get a better deal with a fixed-rate mortgage than an adjustable-rate mortgage right now. A fixed-rate mortgage keeps your rate the same for the entire life of your mortgage while an adjustable-rate mortgage locks in your rate for the first few years, then adjusts it once per year.
Darrin English, Senior Community Development Loan Officer at Quontic Bank, points out that ARMs don't currently follow that pattern. Fixed rates are better than adjustable rates right now, because lenders want to keep customers banking with them for as long as possible. The 30-year fixed rate is lower than the 5/1 ARM rate this week and ARM rates could increase in five years.
It could be a good time to get a fixed-rate mortgage or refinance.
A 30-year fixed mortgage comes with a higher interest rate than fixed-rate loans with shorter terms. For a long time, 30-year fixed rates were higher than adjustable rates, but not right now. fixed rates the better deal.
You'll pay more in interest with a 30-year term than you would for a 15-year mortgage, because a) the rate is higher, and b) you'll be paying interest for longer.
It isn't very common to get a 10-year term for an initial mortgage, but you may refinance into a 10-year mortgage.
Lenders charge similar interest rates on 10-year and 15-year terms, but you'll pay off your mortgage sooner with a 10-year term.
An adjustable-rate mortgage keeps your rate the same for the first few years, then changes it periodically. A 5/1 ARM locks in your interest rate for the first five years, then your rate will fluctuate once per year.
Although ARM rates are relatively low these days, fixed-rate mortgages are still the better deal. The 30-year fixed rates are lower than ARM rates.
Refinance rates are low right now, so you may want to consider refinancing in the next few weeks. Starting December 1, most borrowers will pay a 0.5% fee for refinancing. Additionally a low credit score or a high debt-to-income ratio will result in a higher interest rate, which could cost you more than the 0.5% closing fee over the years.
"I can't see one good reason why someone would choose to go with an ARM versus a 30-year fixed rate in today's market," English said. "Why take the risk when you can get a better rate in a 30-year loan?"
Another thing to consider is the down payment. You may be able to place as little as 3% down on a conventional mortgage. But lenders reward larger down payments with better rates, so you may want to save even more.