As soon as you decide to buy a Santa Cruz home for sale you’ll be looking at loans. You’ll see balloon loans, fixed-rate mortgages, adjustable-rate mortgages and a few others. Fixed and adjustable-rate mortgages are the most common, but why and what’s the difference?
The biggest differences are in cost and security. Fixed-rate mortgages can cost more, but have a measure of security. Adjustable rate mortgages, or ARMs, can cost less, but have less security.
As with all things, ARMs and fixed-rate mortgages have pros and cons. Here are just a few:
The Pros and Cons of ARMs
When you buy a Santa Cruz home for sale with an ARM, your payments will be lower than a loan with a fixed-rate mortgage. Because the payments are lower, you can afford to buy a more expensive home. As well, ARM payments are based, in part, on interest rates. When interest rates fall, your payments go down.
The cons of adjustable-rate mortgages are just as big as the pros. For example, due to the basis of interest rates, you can end up having a higher mortgage payment, if interest rates rise. If rates rise sharply, a 6% ARM can turn into an 11% ARM within four years. Another negative is that borrowers can be confused because ARMs aren’t easy to understand. A shady mortgage company could neatly trap them.
The Pros and Cons of Fixed-Rate Mortgages
With fixed-rate mortgages, your payment stays the same whether interest rates rise or drop. This makes budgeting easier and is a plus when interest rates rise. However, homeowners with fixed-rate mortgages have to refinance if they want to take advantage of dropping interest rates.
Likewise, because the payment never changes, fixed-rate mortgages cost more. Mortgage lenders don’t offer rate breaks on fixed-rate mortgages. The other con, which may be a big one to some, is that fixed-rate mortgages don’t vary from lender to lender. With adjustable-rate mortgages, the lenders are flexible and can customize the loan to your needs; this isn’t true with fixed-rate mortgages.
The biggest question to ask yourself when considering an ARM or fixed-rate mortgage is, “Can I afford my home if interest rates spike?” You could start paying $875 a month, and, with a quick rate rise, end up paying $1,514 within four years.
When considering which type of home loan to use for buying a Santa Cruz home for sale, don’t be afraid to ask a lender to explain the pros and cons of each type in depth. Don’t ever consider signing the contract if you aren’t sure what you’re signing.