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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
Article Source: http://www.simplysearch4it.com/article/10827.html
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