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Adjustable Vs Fixed Rate Mortgages
By: Ethan Hunter
Mortgage rates can either be fixed for the duration of your loan or can be
adjustable. An adjustable rate mortgage is a loan that is set up with an
interest rate that changes based on pre-determined criteria, primarily tied to
the federal interest rate. If the interest rates are up, then your interest rate
on your loan will be higher, if the interest rates are low than the interest
rate on your loan will go down.
Adjustable rate mortgages (ARM) are generally fixed interest rates for a period
of time and then become adjustable. Generally speaking the introductory interest
rate for an ARM loan will be lower than a fixed rate mortgage. This is done in
order to lower initial payments and allow people to take out larger mortgages,
or give them smaller payments for the introductory period. This is attractive to
people who may know that their income will be increasing over that period of
time.
Whether or not to choose an ARM or a fixed rate mortgage has been debated for as
long as there have been ARMs. Though people feel strongly in both camps, simple
mathematics can assist you in determining which mortgage is best for you and
your personality. Your personality? Yes. Some people are not comfortable with
any uncertainty in their lives. The idea of having an uncertain mortgage payment
in the future may cause them more stress than the money they are saving is
worth. Therefore, factor your own comfort level into the equation.
Generally speaking, ARMs are 2, 3 or 5 years, though they can be longer or
shorter. At the end of that period your interest rate will become variable
unless you sell your home or refinance. If you think that the likelihood of your
selling or refinancing within the period of the ARM is strong, than the lower
interest rates of the ARM loan will be of great benefit to you. If you think it
is unlikely that you will sell or refinance within that period, then you may not
benefit from an ARM.
Bob and Robyn are a young married couple just starting out. Bob is in
advertising sales and Robyn is a teacher. Bob is fairly confident that his
income will continue to increase over the next several years as he works his way
up to becoming an account executive. Robyn's income is more predictable and is
on an upward trend. Being a young couple they do not have the finances for large
mortgage payments.
Bob and Robyn are presented with two mortgage proposals for their $150,000
mortgage. Proposal one is a 30-year fixed rate mortgage at 6% and the other is a
5-year ARM at an introductory rate of 5.25%. The fixed rate mortgage payments
would be $899.33 per month, not including taxes. The ARM would have a 5-year
period where payments would be $828.31 per month, not including taxes. Bob knows
that even if he can afford the extra $70.00 per month for the fixed rate
mortgage, that $70 per month may be better spent knocking down principle during
the ARM period. He is further confident that as his salary increases, he is
likely to upgrade his home within five years or refinance to make home
improvements. Bob and Robyn took the ARM loan.
John and Catrina are a married couple with three grown children. John has been
employed at the same company for 18 years and Catrina has been with her company
for 12 years. They have consistent and stable income. Neither John nor Catrina
expect any substantial increases in their salaries. After their last child moved
out of the home they decided to downsize and buy a smaller home. They have a
substantial down payment and will only be taking a mortgage of $100,000 on their
new home. John and Catrina are presented with the same loan options as Bob and
Robyn were. John and Catrina, however, know that it is unlikely they will sell
or refinance in the next five years. They are comfortable with the payment
schedule and, therefore, prefer the certainty of the fixed rate mortgage.
There are countless websites that offer mortgage calculators to determine your
mortgage payment. For your convenience we offer one on our site (if you are not
going to have one on your site, we can remove this, though I think it'd be good
to have one on your site). You can review the different payment schedules based
on the interest rates quoted for the fixed-rate and the ARM. Once you know the
different payment amounts you will be able to determine which loan makes the
most sense for you and your unique circumstances.
Your mortgage professional should also be able to assist you in reviewing the
options and making the best decision for you. The more open and honest you are
with your mortgage professional the more helpful they will be. It is only if
they are armed with full and honest information that they will be able to make
recommendations to you.
About the Author:
Ethan Hunter is the author of many credit related articles. If you are looking for help with Home Loans or any type of credit issue please visit us at http://www.homeloanave.com |
