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Fixed vs Adjustable: What’s Best Mortgage for California First-Time Buyers?

What’s the best type of mortgage loan for first-time home buyers in California, fixed or adjustable? The truth is, it depends on the situation. Here’s what you should know about fixed and adjustable-rate mortgage loans when buying a home in California.

When shopping for a mortgage loan, you’ll eventually reach a point where you choose between a fixed-rate or an adjustable-rate mortgage (ARM). This is an important decision, because it will affect your interest rate and monthly payments over a potentially long period of time.

Fixed vs. Adjustable-Rate Mortgage Loans

Let’s start with a quick definition of these two mortgage products, along with their main features and benefits:

  • A fixed-rate mortgage loan carries the same interest rate over the entire life (term) of the loan. This is true even if you keep the loan for a full 30-year term. This financing option appeals to homeowners who prefer to have long-term predictability. It’s well suited for those who plan to stay in a home for a long time.
  • An adjustable-rate mortgage (ARM) loan has an interest rate that changes, or adjusts, at predetermined intervals. These days, most ARMs are actually “hybrid loans.” This means they start off with a fixed interest rate for a certain period of time, after which the rate begins to adjust periodically.

So, which option is best for first-time home buyers in California, the fixed or adjustable-rate mortgage? The answer will vary depending on the situation. So let’s talk about that next.

What’s Best for California First-Time Home Buyers?

The key here is to think about your long-term plans, as well as the pros and cons of the different mortgage options. This will hep you decide if a fixed or adjustable loan is right for you.

  • Fixed-rate loans are more predictable, but they often cost more. Most of the time (but not always), the average rate for a fixed mortgage is higher than the average for an adjustable / ARM loan. But the rate will never change, so the monthly payments will remain more predictable over time. With this option, you’re essentially paying more in interest for the benefit of long-term predictability.
  • ARM loans can be more affordable in the short term, but they are less predictable over the long term. ARM loans typically have lower interest rates during the initial phase, when compared to their fixed counterparts. This is the main reason why some first-time home buyers in California use ARM loans. They do it to save money during the first few years.

As you can see, there are pros and cons associated with both options. The key is to choose the best financing strategy for your particular situation.

ARM Loans Can Work Well in Certain Situations

When choosing the ARM versus the fixed-rate mortgage, you should think about your long-term plans. You’ll also want to consider how comfortable you are with risk, in the form of an interest rate that changes over time.

  • If your primary goal is to minimize your monthly payments during the first few years, the ARM loan might be your best option.
  • If you’re in it for the long haul, or if the idea of an unpredictable interest rate unsettles you, you might lean toward a fixed-rate mortgage loan instead.

California first-time buyers who only plan to stay in a home for a few years might benefit from using an ARM loan. Depending on current interest rate trends at the time you apply for a mortgage, you might be able to secure a lower rate on an ARM loan.

Adjustable mortgage products often start off with a lower rate, when compared to the more stable fixed home loans. So it’s possible to use an ARM for a first home purchase in California, in order to minimize your monthly payments.

You just have to remember that the rate can begin to change, once the initial fixed phase has passed. For instance, a 5/1 ARM loan has a fixed rate for the first five years. After that, it can change every one year (or annually).

Some first-time home buyers in California use the 5/1 adjustable-rate mortgage (or a similar product) to enjoy the “best of both worlds.” They might secure a lower interest rate, while also enjoying five years of a fixed / unchanging mortgage.

You just need to have a plan for when the ARM loan’s interest rate begins to change. You could either hang on to the loan and accept those changes — or sell or refinance the home prior to first adjustment. Research and planning are your best tools.

Think About Your Long-Term Plans

You might have noticed a recurring theme throughout this article. It has to do with your long-term plans and objectives.

  • California first-time buyers who plan to stay in a home for a long time might be better off using a fixed-rate mortgage to finance their purchases.
  • Home buyers who only expect to stay in a house for a few years (or plan to refinance at a later date) could benefit from the money-saving potential of an ARM loan.

Despite its length, this tutorial does not cover every possible lending scenario. Instead, it’s meant to illustrate the basic differences between fixed and adjustable-rate mortgage loans. We encourage you to conduct additional research before making a final decision.

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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