You decided you are ready to buy a home. Congratulations! Now you have a lot of decisions to make. Besides the size of the home, its location, and features, you have to think about your mortgage. What type of mortgage do you want? Aside from the term, you’ll have to choose between a fixed rate and variable rate. Which one is right for you?
It all depends on your situation. Below we’ll walk you through the questions you must ask yourself to help you decide which type of mortgage is right for you.
How Long Will You Live in the Home?
The first question you must ask yourself is how long you will live in the home. Try to be realistic with your expectations. Do you see your family size expanding? Is your home large enough to accommodate children or do you need to move elsewhere? Are you at a job that likes to relocate its employees? If you answered yes to any of these questions or have another reason you would likely move from the home sooner rather than later, a variable rate loan might be a good choice. If you move before the rate adjusts, you get the benefit of the low, introductory rate and never have to worry about it adjusting.
On the other hand, if you think this is it and this home is your forever home, you may want to take the fixed rate loan. You never have to worry about this rate adjusting or your payment fluctuating. The payment you have now is the payment you’ll have in the future. The only exception would be if you pay PMI now and are able to cancel it in the future; your payment would be lower then.
Will Your Income Change?
Did you take a job for little income now, but know you have the potential to make much more income in the near future? Do you work on commission and could benefit from a low interest rate for the time being? If either of these situations applies to you, you may benefit from the variable rate loan. Having the benefit of the lower payment for at least a few years can give you time to save money and stay on top of your finances. Once the rate adjusts, you can figure out how to proceed, whether that means keeping the loan or refinancing into a fixed rate loan.
If your income is stable and you don’t see yourself getting a large pay raise, such as doctors get once they are out on their own after their residency, then a fixed rate loan may be the better option. It gives you a predictable payment that won’t change. This allows you to properly budget.
Are you Risk Averse?
Finally, you have to consider your tolerance for risk. Do you like to take a gamble or do you prefer to play it safe? If you are a gambler, the variable rate loan might be just what you want. You can take the chance that the rates will adjust to your benefit during the adjustment period. As a reward for the risk, you get the lower introductory rate. When the rate adjusts, though, you’ll have to pay the price, so to speak.
If you don’t like risk, you would be better off with the fixed rate loan. There are no guessing games or risks you have to take. You know exactly what you are getting yourself into and you can budget accordingly, especially if you change jobs or make other adjustments in your life.
As a first-time homebuyer, you will have to do some serious soul searching when determining which type of rate is right for you. Talk to a few lenders and get quotes for both the fixed rate and variable rate loans. This way you’ll know the full impact of both options and can decide which one is right for you.