When you’re trying to find the right interest rate for your new home mortgage, you have two choices: Fixed-rate and adjustable-rate interest.
Your interest rate plays a big role in home affordability. The interest rate is how much the bank gets paid for lending you the money to buy a house, and you pay it back to them on a monthly basis as part of your mortgage payment.
William Bolton, a Homeownership Advisor with our Twin Cities Habitat for Humanity Homeownership Program, breaks down the difference between a fixed-rate and adjustable-rate mortgage:
Fixed-Rate vs Adjustable-Rate
A fixed-rate mortgage has an interest rate that does not change for the term of the loan. What does this mean for the borrower?
It means if your mortgage has a 3% interest rate, it will always remain at 3% interest, no matter how market conditions might change. That means you have predictable payments and peace of mind that your interest rates won’t rise.
An adjustable-rate mortgage has an interest rate that is set for a short amount of time. After that initial period, the interest rate will fluctuate based on market conditions. If your interest rate increases, then your monthly payment will increase as well and you will end up paying more for your loan. If your interest rate decreases, then your monthly payment will decrease.
So, the big difference is how your interest payments will be managed over the life of the loan and how that impacts the predictability of your monthly payment. With an adjustable-rate mortgage, the interest rate can adjust based on market conditions. Depending on market conditions, this could be good or bad, but with a fixed-rate mortgage your interest rate will not change, which means your monthly payment likely will not change either.
Which Is Better for a First-Time Homebuyer?
While adjustable-rate mortgages may sound attractive because they present the opportunity of a lower interest rate right now or possibly in the future, they also have far more risk than a fixed-rate mortgage.
“You would have to be financially savvy to predict the market if you want to be somewhat comfortable in an adjustable-rate mortgage,” says William.
So your choice of mortgage depends on your knowledge of the fluctuating market. For most first-time homebuyers, it makes more sense to have a fixed-rate mortgage. They’re a safer, more long-term bet. As William says, people can stay in their homes for 15 to 30 years without having their principal and interest payments adjust with a fixed-rate mortgage.
Homeownership Program Rate
With a Habitat mortgage*, we promise a fixed-rate of 3% over the life of the mortgage (3.0538% APR). So our clients enjoy a low interest rate without ever fearing a change in their monthly principal and interest payment due to the interest rate fluctuating.
Interested in our Homeownership Program? Learn more about what it takes to buy with Habitat on our Mortgage Criteria page.
*Habitat mortgages are provided by TCHFH Lending, Inc., Twin Cities Habitat for Humanity’s wholly-owned nonprofit mortgage subsidiary.