Fixed-Rate Mortgages vs. ARMs
"What program should I get; a fixed rate or an ARM?"
This question has confused every homebuyer who has
shopped for a loan.
Fixed Rate Mortgage is when your interest rate
and monthly payment will remain the same for the life of
the loan. Fixed rate mortgages are offered in a variety
of terms; 30 and 15 years are the most common programs.
Fixed-Rate Loans are more straightforward and easier to
understand than Adjustable Rate Mortgages (ARMs). They
are also more secure for the buyer, and are popular with
first-time homebuyers.
Fixed-Rate Loan benefits include:
- As interest rate rise, no change will occur in
monthly principal and interest payments
- More stability may give you "peace-of-mind"
Fixed-Rate Loan disadvantages include:
- Fixed-rate mortgages generally have higher
interest rates than ARM mortgages
- Less flexibility
Adjustable rate mortgage (ARM) starts at a low
interest rate and then adjusts according to the economy,
so monthly payment can rise or fall. There are many
different types of economic indicators that can be used
as an index: 6 Month treasury, 3yr treasury, 5yr
treasury, COFI, or LIBOR. Adjustable rate mortgages
offer a variety of programs: 7/1, 5/1, 5/6, and 3/1 are
being the most commons.
For example: In 5/1 ARM, the initial interest rate is
locked for first 5 years, then annually adjusted for the
remaining 25 years. There will be a maximum amount the
rate can go up per year, and there will be a lifetime
cap for the ARM meaning interest rate will never exceed
a designated percentage.
ARM Mortgage benefits include:
- Lower interest rates makes qualifying easier and
payments are lower
- May qualify for a higher loan amount due to
lower initial interest rates
- Lower interest payments if the interest rate
drops over time
- If you are planning on living in a property for
a short period of time then the benefits of getting
an adjustable rate mortgage are enhanced
- Interest rate caps limit the maximum interest
payment allowed for the loan
ARM Mortgage disadvantages include:
- Interest rates may go up which will lead to
higher payments
|
