What Different Types of Mortgage Rates Do Lenders Offer?

Before you start house hunting, you'll need to go shopping for mortgage rates. A mortgage is likely to be the longest and largest debt obligation you'll ever take on, so it's important to secure the most favorable mortgage rate possible while meeting your other mortgage needs. Doing so is the key to minimizing your monthly mortgage payments and limiting the overall cost of homeownership.

But the question is, where do you start?

Several types of mortgage rates are available in the market. Choosing the one that works best for your circumstances could potentially save you thousands of dollars and minimize the impact of homeownership on your budget. Let's discuss further.

How Many Types of Mortgage Rates Are Available?

Your mortgage rate will greatly affect the total cost of your mortgage. Considering that mortgages typically last for 15-year or 30-year terms, the choices you make when you first take on your mortgage will impact your finances for a long time.

While the market offers various loan types within these two categories, the first step to choosing a loan is determining which mortgage rate works best for you. There are two main types of mortgage rates:

• Fixed-rate mortgages
• Variable-rate mortgages

For fixed-rate mortgages, the interest rate remains the same over the loan’s life, and as a result, your mortgage payments will always stay the same. For this reason, fixed-rate mortgages are ideal for buyers who prioritize predictability when budgeting.

Fixed loans typically come in 15-year, 20-year, or 30-year terms, though it's not unheard of for mortgage lenders to offer eight-year term mortgages. Most buyers opt for the 30-year mortgage because it offers the lowest monthly payments, making it the more affordable option. The trade-off, however, is that you’ll end up paying more for the house than if you chose a 15-year or 20-year mortgage.

Variable-rate mortgages, or adjustable-rate mortgages (ARM), have a variable interest rate, which can change depending on market conditions. ARMs have a fixed period during which the initial interest rate doesn't fluctuate. After the set period, which can range anywhere from one month to 10 years, the loan resets based on current market rates — this interest rate will remain constant until the next reset period.

What Is the Most Popular Type of Mortgage Rate For First-Time Buyers?

Fixed-rate mortgages are the most popular among first-time buyers because they offer more predictability. You know exactly how much to set aside each month for your mortgage payment. For borrowers with adjustable-rate mortgages, the situation is a little different, considering how often interest rates change. There’s also the potential disadvantage of rising interest rates, which could stretch your budget thinner than you'd like.

However, homeowners often overestimate how long they'll stay in a home, which tends to make the 30-year fixed-rate mortgage a wasteful choice for most. Adjustable-rate mortgages could be more suitable for you if you're looking for a starter home or intending on moving or refinancing your home within 10 years of moving in.

How Do You Know Which Mortgage Rate to Choose From?

No two mortgage borrowers are alike. When choosing a mortgage, it’s best to factor in your personal situation as well as the economic realities you find yourself in. Ask yourself the following questions before choosing a mortgage-rate type:

• How big of a mortgage payment can you comfortably afford today?
• Could you still afford your adjustable-rate mortgage if interest rates rose?
• In what direction is the market heading, and do you anticipate mortgage rates to rise?
• How long do you intend to live in the house?

When choosing an adjustable-rate mortgage, it’s important to be comfortable with a certain level of risk because of how unpredictable interest rates and other economic conditions can be. That said, all mortgages come with a certain degree of risk. Individuals' personal finances often experience periods of waxing and waning. That's why it's advisable to shop for mortgages and consult with a mortgage expert before choosing a loan.

Are the Requirements the Same for All Different Types of Mortgage Rates?

Besides the market, your personal financial situation also impacts your mortgage rate. Mortgage lenders use the same information to determine what interest rate you qualify for. Factors that affect your interest rate include your credit scores, debt-to-income ratio, down payment amount, and length of open credit lines.

From a creditworthiness perspective, the requirements are the same for the different mortgage rates. It might actually be easier to qualify for an adjustable-rate mortgage than a fixed-rate mortgage if you have a high debt-to-income ratio because ARMs typically have lower monthly payments during the introductory period.

You’ll find interest rates vary widely with lenders, even though you provide them all with the same information. In essence, this is because different lenders have different risk appetites, which is why some lenders are more willing than others to work with individuals with low credit scores. If you’re looking to lower your mortgage rate, your best option is to shop around for a better rate, increase your credit score, or pay off some of your existing debt. But, if you’ve already purchased a home, you might want to reconsider refinancing it to capitalize on lower interest rates.

What Are the Pros And Cons of Each Type of Mortgage Rate?

Fixed-Rate Mortgages

Ideal for buyers with a low-risk appetite or those looking to stay in their home for an extended period because the monthly principal and interest payments remain the same over the loan’s life, making it easier to budget. However, interest rates are typically higher than those on ARMs, which means you might end up paying more if you choose a longer-term loan.

Adjustable-Rate Mortgages

Compared to fixed-rate mortgages, ARMs offer a lower fixed rate in the first few years of homeownership, helping you save a substantial amount of money. However, if market conditions changed and interest rates rose significantly, your monthly mortgage payments could become unaffordable. Also, there's the possibility that home values may fall, which can make it harder to refinance or sell the home.

Pick the Best Lender

When choosing a lender, customer service is paramount. Choose a lender willing to provide you with all the information you need to make an informed choice. Additionally, you can conduct digital searches and use mortgage calculators to determine which loan type will save you money and work best for your circumstances.

More About the Different Types of Mortgage Rates

FAQ #1: Which Type of Mortgage Rate Offers the Lowest Rate?

Adjustable-rate mortgages typically offer low introductory rates compared to fixed-rate mortgages. ARMs can save you money on interest over the short to medium term, but they carry more risk than fixed-rate mortgages. You might find yourself with a much higher monthly mortgage bill after the introductory period has passed.

FAQ #2: Which Type of Mortgage Is Best If You Plan to Sell?

An adjustable-rate mortgage is your best option if you plan to sell your home within a few years of buying it. It will help you capitalize on lower interest rates in the short term. However, if you plan on staying in your home for over 10 years, a fixed-rate mortgage can insulate you from changing market and economic conditions by keeping your interest rate constant.

FAQ #3: How Can I Change the Type of Mortgage Rate I Have?

You can refinance your existing mortgage to an adjustable-rate or fixed-rate mortgage. For borrowers with an adjustable-rate mortgage, refinancing to a fixed-rate mortgage with lower interest rates can save you money in the long term. Consult with your lender about refinancing rates to help you choose an option that will reduce your monthly obligations or help you pay off the loan faster.