Often buying a home, especially your first home, can be a scary endeavor. The two most common types of home loans are the fixed-rate home loan (FRM) and the adjustable-rate home loan (ARM). Generally speaking, the loans that are most often chosen in the United States are fixed-rate mortgage loans.
Developed by the Federal Housing Administration (FHA), the interest rate on your fixed-rate home loan will remain the same for the duration of the loan. When compared to other loan types, like an ARM, the interest rate for these loans is usually substantially higher. Most borrowers choose a fixed rate home loan because the risk of the monthly cost increase is too great with an ARM.
When the full life of the loan is considered, borrowers who choose fixed-rate mortgage loans will often end up paying more than those who choose an adjustable rate. This is because the lenders will increase their margin for a fixed rate home loan to protect profits from possible index rate increases in the future. This also means that if the index rate goes down, the FRM borrower will be paying much more in interest than they would if their loan were adjustable.
The most common fixed-rate loans are drafted for 15 or 30 years. In some cases, the loan can be extended for up to 45 years in areas that have higher property values and less turnover. The shorter the loan term, the lower the interest rate will be; however, monthly payments will likely be higher because the amount borrowed will have to be paid off in a shorter period of time.
Fixed-rate mortgages are much simpler than adjustable-rate mortgages, making it easier for borrowers to understand the terms of their loan and more appealing to first-time borrowers. If a home buyer chooses an FRM, the likelihood is that their income will increase during the life of the loan and they may be able to pay it off early without penalty. For ARM loans, there is generally a price for ending the loan term early.
Why choose an FRM?
- If the indexed interest rate increases, it will not affect the FRM interest rate
- Monthly payments will not increase unexpectedly during the life of the loan
- Prepayment is often allowed without penalty
The average 30 years fixed rate home loan interest rate in Washington State is 4.13%, compared to the 4.39% national average. The average is lower in Washington because the foreclosure rate and property availability have decreased in the last few years. When you choose a fixed-rate mortgage in Seattle or Bellevue, the Washington real estate market trends may play a part in what the loan interest rates will be. As a first time buyer, an FRM is the “safer” choice but as a borrower builds equity and increases asset value the potential savings could make ARMs a better choice for future loans.