The loan you choose matters nearly as much as the house. The basic decision is between certainty and a lower initial payment.
Fixed rate
The interest rate never changes. Your principal and interest payment on day one is the same in year twenty. Taxes and insurance still move, but the loan itself does not.
The advantage is that you can plan. The disadvantage is that you usually pay a slightly higher starting rate for that certainty, and if rates fall significantly you have to refinance to benefit.
Thirty years is the common term. A fifteen-year loan carries a higher payment and a lower rate, and saves a great deal of interest over its life. If you can comfortably carry the payment, it is worth pricing both.
Adjustable rate
An ARM starts with a fixed period — commonly five, seven or ten years — then adjusts periodically based on an index plus a fixed margin. A 7/6 ARM is fixed for seven years, then adjusts every six months.
The starting rate is typically lower than a comparable fixed loan. That is the whole appeal, and it is a real benefit if your circumstances match the structure.
The questions to ask about any ARM
Do not accept “it is fixed for seven years” as a full explanation. Ask:
- What index is it tied to, and what is the margin added to it?
- What are the caps — on the first adjustment, on each subsequent one, and over the life of the loan?
- What is the maximum possible payment, in dollars, if rates rise to the lifetime cap?
- How often does it adjust after the fixed period ends?
- Is there a prepayment penalty?
That third question is the important one. Ask for the worst-case payment as an actual number. If you could not comfortably pay it, you are relying on being able to sell or refinance before then, and neither is guaranteed.
How to choose
A fixed rate suits you if you expect to stay a long time, you value predictability, or your budget has little room for a payment that could rise.
An ARM may suit you if you have a specific, credible reason to expect to be out of the loan before it adjusts — a known relocation, a career pattern of moving every few years — and you could absorb the higher payment if you turned out to be wrong.
The failure mode is predictable. People take the ARM because it is the only way to afford the house, intending to refinance later. Then rates are higher, or values fell, or their income changed, and refinancing is not available. Do not let the loan structure be what makes a house affordable.
Other things worth asking about
Government-backed programmes — FHA, VA, USDA — have their own rules and can be strong options, particularly for lower down payments, for veterans, or for rural properties, and parts of Spokane County qualify for rural programmes that surprise people. Washington also offers down payment assistance programmes through the state housing finance commission that are worth asking a lender about.
We do not originate loans and we are not paid by lenders. Ask us for names of local people we have watched perform well, and compare their Loan Estimates side by side.