Fixed And Adjustable Rate: What’s The Difference?

What’s the difference between a fixed and adjustable-rate mortgage? Which one best fits your needs? Let’s take a look at what each offers.

Fixed-Rate Mortgage

What

A fixed-rate mortgage has a fixed interest rate for the entire length of the loan agreement. However, it’s important to note that you can still incur additional costs such as property taxes, any HOA fees, or insurance rates that may fluctuate.

Who

Fixed-rate mortgages are best for those who don’t want to bank on the risk of the market for rates. Fixed-rate mortgages stay largely the same over the period of loan terms, 10 to 30 years on average, making it more practical for homeowners to plan accordingly for major expenses.

Why

A fixed-rate mortgage can be ideal for buyers because the rate does not change. Fixed-rate mortgages are historically chosen by 70-75% of buyers. In addition, these buyers tend to hold the same property for a long period of time.

Adjustable-Rate Mortgage

What

An adjustable-rate mortgage is a rate that is usually fixed for the first few years and then adjusts based on market changes. Most adjustable-rate mortgages have 30-year loan terms with loan rate adjustments after the first fixed period. The periods generally last for a year, but some rate periods can span up to 10 years, depending on contractual terms.

Who

Adjustable-rate mortgages are marketed to people with lower credit scores or who will benefit from longer loan terms or cheaper initial payments.

Why

Cheaper initial payments can be attractive to buyers. They’re also beneficial for those who plan on being in a home for a short period of time. For example, an adjustable-rate mortgage is a good option if you’re building a home and purchasing a temporary one to live in while you’re waiting for your permanent home to be completed.

Fixed-Rate vs. Adjustable-Rate Mortgage

Determining which rate is right for you will depend on a variety of factors. Choosing between the two will come down to your specific position and needs on:

• Risk management
• Property holding plans
• Initial monthly payments
• Interest rates
• Market changes

If you’re a prospective homeowner in California and would like more information on which mortgage is best for you, contact UW Funding. Our specialists can help you understand the mortgage process and specifics to match your needs.