Last year hit the global economy like a double-edged sword. As the coronavirus pandemic swept through the United States and the rest of the world, unemployment rates jumped and markets shifted. Although much of what 2020 has dealt with was negative, the pandemic has provided a significant advantage to potential home buyers: historically low interest rates.
In March 2020, the Federal Reserve lowered interest rates to a range of 0% to 0.25% to protect the economy from the impact of COVID-19. Lower rates have trickled down to consumers who are now seeing low mortgage rates.
With today’s low mortgage rates, some buyers want to decide which type of mortgage would be best. Current rates are likely to rise over the next few months or years, so now may be the best time for buyers to take advantage of the lowest possible mortgage rates.
You can explore your mortgage options by visiting Credible to compare rates and lenders.
Types of mortgage loans: fixed rates or adjustable rates
Mortgages fall into two basic categories:
- Fixed rate mortgage
- Adjustable rate mortgage (ARM)
Both loans are interest-bearing and are available in different terms (ie 15 years, 20 years, 30 years), but there are important differences.
1. Fixed rate mortgage
In a fixed rate mortgage, the interest rate remains the same throughout the life of the loan. The only way your interest rate would change would be through a refinance.
If you’re considering refinancing a loan, visit an online marketplace like Credible to see current refinance rates or to withdraw money from your home to pay off high-interest debt.
2. Adjustable rate mortgage (ARM)
A variable rate mortgage charges interest on the loan balance at variable interest rates over the term of the loan. Rates vary based on a specific index and ARM margin. The lender will generally offer lower spreads to customers with higher credit scores. Plus, many lenders offer introductory rates, which are usually incredibly competitive. The initial rate is generally fixed for a fixed term before changing to an adjustable rate.
There are limits on the amount of interest that can change each year and the total amount that it can change (there is a cap on the maximum interest rate your lender can charge, no matter what happens on the market).
If you want to switch to a fixed rate mortgage, you’ll want to refinance through a site like Credible.
HOW TO PAY OFF YOUR MORTGAGE EARLY
Should I take out a fixed rate mortgage or an adjustable rate mortgage?
Choosing the right type of home loan will affect your finances for years to come. Don’t be afraid to ask lots of questions when talking to lenders. Take the time to review your budget and know how much you can comfortably afford so you’ll be ready to go when it’s time to commit. You can explore your mortgage options by visiting Credible to compare rates and lenders.
Fixed rate mortgage: The obvious advantage of a fixed rate loan is that you know how much you will pay each month for the duration of your loan. A fixed rate loan makes budgeting easier. Right now, interest rates are at historic lows. At press time, the average 30-year fixed rate mortgage is 2.65% and the average 5/1-year ARM is 2.75%, according to Freddie Mac.
If you want to refinance a fixed rate mortgage to take advantage of low interest rates, plug your information into Credible’s free online platform and see what offers you qualify for.
Adjustable rate mortgage: Variable rate mortgages are a good option for buyers who plan to move or refinance their mortgage within 10 years. Most buyers will not achieve the maximum interest rate on their loan within this time frame. Also, people may qualify for a higher variable rate mortgage before they qualify for a fixed rate mortgage.
Variable rate loans have several options that provide flexibility, including interest-only ARMs, payment-option ARMs, and hybrid ARMs.
Fortunately, there are free online tools that make it easy to refinance your mortgage. By entering a few simple details, you can pre-qualify in minutes.
WHY IT’S A GOOD IDEA TO REFINANCE YOUR MORTGAGE WHILE RATES ARE LOW
Fixed rate mortgage: Fixed rate mortgages also have drawbacks. When interest rates are higher, they are more difficult to obtain, especially if you have credit problems. Additionally, while fixed rate mortgages are ideal when interest rates are low, buyers of an adjustable rate mortgage might see lower rates and lower monthly payments when the market changes. The only way to lower your interest rate with a fixed rate mortgage is to refinance.
If you’ve determined that a mortgage refinance makes sense, be sure to compare rates online to find the right lender for your needs and budget.
REFINANCE YOUR MORTGAGE BEFORE RECORD LOW RATES GO
Adjustable rate mortgage: The main disadvantage of an adjustable rate mortgage is that your monthly payments may change after the introductory period. Your monthly payments could adjust several times over the life of the loan, making it difficult to maintain a stable budget.
If you are considering a variable rate loan, ask your lender about the lifetime limit. Most lenders have a 5-6% cap (meaning your interest rate can’t go up more than 6% over the life of your loan). If your introductory rate is 3%, the maximum interest rate you could pay in this case would be 9%. Use an online mortgage calculator to determine if you can afford the higher option. At the very least, you’ll have a complete picture of what your payouts might look like if the market changes drastically.