Adjustable vs. Fixed Rate MortgagesMortgage 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. 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
MORE RESOURCES updated Thu. April / 25 / 2024 10-year refinance rates: What to know about the current market CNN Underscored Should You Refinance Halfway Through Your Mortgage? Bankrate.com How to Refinance Your Mortgage NerdWallet Only Half Of Black Seniors Approved For Home Repair Or Refinance Loans To Age In Place Block Club Chicago Mortgage Interest Rates Today, April 24, 2024 | Rates Still Slated to Go Down This Year Business Insider 30-Year Mortgage Refinance Rates Business Insider 15-Year Mortgage Refinance Rates: Compare Current Rates Business Insider Mortgage Interest Rates Today, April 22, 2024 | The Still-Hot Economy is Keeping Rates High Business Insider Mortgage Interest Rates Today, April 21, 2024 | Rates Remain Near 7% Business Insider How To Get The Best Refinance Rate Bankrate.com How To Choose The Right Kind Of Refinance For You Bankrate.com Will Interest Rates Go Down in May 2024? | Mortgage Rates Forecast The Mortgage Reports Current Student Loan Interest Rates in April 2024 Business Insider Average Mortgage Interest Rates: Mortgage Rates by Credit Score, Year, and Loan Type Business Insider The best mortgage lenders for refinancing in April 2024 CNN Underscored Mortgage Rates This Week NerdWallet MBA: Mortgage Applications Decreased in Weekly Survey Calculated Risk Best Mortgage Refinance Lenders In 2024 Bankrate.com Should You Refinance Your Mortgage In 2024? Bankrate.com Current mortgage refinance rates CNN Underscored When to Consider Refinancing Your Mortgage Business Insider Best Refinance Lenders of April 2024: Refinance Your Mortgage The Motley Fool How To Refinance A Rental House Bankrate.com Mortgage Interest Rates Today, April 19, 2024 | High Rates Make for a Challenging Homebuying Season Business Insider Mortgage Rates Chart | Historical and Current Rate Trends The Mortgage Reports Best Mortgage Refinance Lenders of April 2024 Business Insider Refinance Requirements: What You Need to Refinance Your Home in 2024 The Mortgage Reports Mortgage Interest Rates Today, April 20, 2024 | Rates Remain Elevated, but They Could Fall Later This Year Business Insider How Soon Can You Refinance a Mortgage? NerdWallet How To Refinance An Underwater Mortgage Bankrate.com Conventional Refinance Rates and Guidelines for 2024 The Mortgage Reports Refinancing a Home Equity Loan (2024 Guide) MarketWatch 30-year refinance rates: What to know CNN Underscored Mortgage Rate Predictions: Are 7% Rates Here to Stay in 2024? Norada Real Estate Investments Mortgage Rate Forecast February 2024 Bankrate.com Current 15-year refinance rates — and lenders that offer them CNN Underscored Mortgage Rate History: 1970s to 2023 Bankrate.com When should I refinance my mortgage? To determine if a refinance is the right move for you, you’ll need to know the ... The Wall Street Journal Pros and Cons of a Cash-Out Refinance Bankrate.com What Credit Score Do I Need To Refinance? Bankrate.com Should I Refinance My Mortgage Now? When to Refinance As Rates Drop Business Insider Office of Research blog: A look at cash-out refinance mortgages and their borrowers between 2013 to 2023 Consumer Financial Protection Bureau
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