When it's time to buy your new house, there are 2 different types of mortgages to take a look at: adjustable rate and a fixed-rate mortgages. If it's your first time buying a home, you'll want to know the difference between the 2 kinds of mortgages so that you can have a general understanding of what they are before the mortgage broker attempts to explain them to you.
Adjustable Rate Mortgages
This often seems like the most attractive mortgage due to its lower interest rate. At the beginning of the mortgage term you'll be offered an interest rate that is lower than the one you'd find with a fixed-rate mortgage. The problem is that the rate of interest won't be locked in and later on the monthly payments can go up if the interest rate rises. In some cases it can be a wise choice to get this type of mortgage especially if you are expecting an increase in your financial income within the next few years.
Fixed Rate Mortgages
You'll have to pay a higher rate at the beginning of your mortgage for this home loan. The beauty of this type of mortgage is the rate will remain locked in place during the entire term of your mortgage. For many people, a fixed-rate mortgage provides a sense of security since you'll always know exactly how much your monthly payments will be from one year to the next. They will never rise and they will never fall. This also makes it a lot easier to prepare monthly and even yearly budgets.
When is it Best to Get an ARM or Fixed-Rate Mortgage?
As you consider your mortgage options, an adjustable rate mortgage, or ARM, is perfect if you plan on refinancing your mortgage before the end of the ARM's term. For people who have a lower credit score, an ARM can keep the mortgage payments manageable while you build up your credit. If you expect an increase in your finances within a few years, an ARM can allow you to purchase the home you want and be able to afford a more traditional mortgage in the future. A fixed-rate mortgage is a better option when you expect your current financial situation to remain the same for years to come. Your mortgage payments will stay the same throughout the life of your loan, and you won't have to worry about rate changes like you do with an adjustable rate mortgage. If the interest rates are low and you can afford a fixed-rate mortgage, this is usually the better choice.
Taking out an adjustable rate mortgage can be a risk, especially if you're expecting the interest rates to go up. Your mortgage expert can let you know more about these loans and explain any further details to you. As things stand now, the Canadian interest rates aren't expected to go down and people are watching the newspapers to see when the rates will rise. For this reason, most new home buyers will be taking out a fixed-rate home loan unless there are extenuating circumstances that suggest taking out an adjustable-rate mortgage instead.