Fixed Rate Mortgage
Your interest rate and mortgage payments stay the same throughout the term. This means you will always know exactly what your payment will be at any point during the life of the loan. The Advantage of a fixed rate mortgage is that your interest rate is protected against market fluctuations.
Adjustable Rate Mortgage ARM
Adjustable Rate Mortgage – Fixed Rate Mortgage. Your interest rate changes with the lender’s prime rate while your mortgage payments remain the same throughout term. This means if interest rates go down, more of monthly mortgage payment gets applied to the principal. If interest rates go up, more of your payment will go towards interest.
Just keep in mind that interest rate changes can affect your amortization period (the number of years required to pay back your loan), if the rate increase results in a longer payback period, your payments may have to increase to make up the difference.
Now that you have familiarized yourself with Fixed vs. ARM Mortgages lets dig a little deeper with variety of Adjustable Rate Mortgages with this simple guide so you are prepared and feeling confident before you meet with a Mortgage Advisor.
Here are some of the most popular ARM programs:
- Traditional ARMs – The interest rate starts out with a low rate to entice you to sign-up (called a teaser rate), then begins its slow or not-so-slow climb upward each month within the time frame you agreed upon with your lender.
- Interest only ARMs – You only pay the interest each month for the specified time period you selected and when the time elapses you begin paying the additional principal and interest payment.
- Hybrid ARMs– These are usually shown as 3/1, 5/1, 7/1 or 10/1. This means they are fixed for 3, 5, 7 or 10 years and then adjust every year after the specified period of time.
If you are thinking an adjustable rate mortgage is a good fit for you then you need to keep these points in mind before you sign:
- Starting Interest Rate: This is your initial interest rate
- Adjustable period: Your option of having your rate change monthly, bi-annually or annual and if you choose this you should always choose annual.
- Index:The cost for your mortgage lender to borrow the money.You should choose a slow changing index like (COFI) because as your lenders index rate goes up, so does yours.
- Life-of-the-loan cap: This is highest interest rate your mortgage can go up too.
- Periodic cap: This limits how much the interest can adjust in a one-year period.
- Low margin: This is the mortgage lenders profit margin which should be around 2.75 percentage points
- Prepayment Penalty: A penalty for paying your mortgage off early, and is usually around six month’s worth of mortgage payments. There should never be a penalty for paying off your loan sooner than expected.
What You Need to Know about Interest Rates
As you already know, interest rates play a critical role in your mortgage, so we put together few pro tips and suggestions to get you started on the right track.
Here are the three key areas to be familiar with before borrowing money:
- The base interest rate – The interest rate the mortgage advisor secured from the lender for your mortgage.
- The annual percentage rate (APR) – The total cost of your loan including the closing costs that are divided over the number of years of your loan. (This number will be different that the base interest rate, which does not have any fees or closing costs factored into it).
- The lifetime cost of the loan – The big scary number that shows you how much you are paying back over next thirty years.
What is Better Fixed or Adjustable?
The right program for you depends on your personal goals and unique needs. Only You, your family and your trusted mortgage advisor can decide on the best mortgage for your situation.
Get a Fixed Interest Rate Mortgage (includes 30, 25 ,20, 15 or 10 year terms) if you:
- Want stability
- Need peace of mind
- Are risk-averse
- Not sure when your next pay increase will be
- Want this to be the last time you move
- Have your dream home
- Have longer term plans for the house
Get an Adjustable Rate Mortgage (includes 3/1,5/1,7/1,10/1, Option ARMs, Interest Only ARMs, Hybrid ARMs) if you:
- Plan on moving in 3-5 years
- Make seasonal income that varies
- Don’t mind a little risk
- Have significant savings
- Are buying a home that you might outgrow quickly
- Aren’t sot sure you like the house, but its livable
- Manage your finances well
- Understand how the financial markets work