Welcome to the second installment of mortgage week, inspired by my recent refinance. If you missed yesterday’s post be sure to check it out to learn about Mortgage Brokers and how they get paid. Today we are going to look at the two main types of mortgages available and tomorrow we will cover Par Rates and Points.
Fixed Rate Mortgages
Fixed rates are exactly what they sound like, fixed. When you get a fixed rate mortgage you are locking in the current available rate for the length of the loan, if you want to to get a lower rate you are going to have to refinance. Refinancing is going to cost you in closing costs again as well as the hassle of the paperwork.
One advantage of a fixed rate is a steady payment amount for the life of the loan. You will always know what you are going to be paying and it will never change. The amount of your payment going to principal is going to slowly increase, while the amount you pay in interest slowly decreases. These amounts are known when you book the loan, you will be provided with a payment schedule called a loan amortization. The amortization shows you each and every payment laid out for the rest of the loan, the only variable will be your escrow which will change only if your insurance premiums or your tax appraisal changes. If you make extra payments on your mortgage the amortization is going to be off from your initial statement but as long as you don’t have a pre-payment penalty, and you shouldn’t, extra payments are in your best interest.
With a fixed rate mortgage the easiest way to pay less interest is to get a shorter term loan. A 15 year loan is going to offer you a lower initial interest rate with a higher payment than a 30 year mortgage, but you will be paying considerably less in interest over the life of the loan.
Adjustable Rate Mortgages
Adjustable rate mortgages are trickier than a fixed rate mortgage. You are basically placing a bet on the interest rates at a set point in time. The rate on the ARM loan is actually variable and subject to adjustments. This is partially what has caused the mortgage mess we have found ourselves in. People were taking on homes they couldn’t afford and financing them with ARM loans so the payments were affordable. When rates went up and their payments adjusted they could no longer afford the payment and POW foreclosure. With that said, ARM loans aren’t exactly the devil they can be beneficial in some respects.
As I previously alluded to an ARM loan could actually allow you to afford to purchase a house you wouldn’t otherwise be able to buy if you were getting a fixed rate. If you know for certain your income is definitely going to increase in the near future than this may be an option so you can get in that dream house. The rates for an ARM loan are usually initially lower than those of the fixed rate loans. They are tied to some form of market index, the example wholesale lender table I looked at was using the 1-yr T-Bill index. They take the base index rate and then add several percentage points to arrive at your rate. Most ARM loans have caps in place which state the maximum amount a rate can increase at one time, or a payment cap which states the payment can never exceed a given amount.
Head to Head
In my opinion this isn’t even a contest. You are talking about your dwelling, the roof over your head. Why would you risk the possibility of losing your house and not being able to afford your payment? You should stick to looking for a fixed rate mortgage for the home you are living in. If you can’t qualify for a fixed rate loan, or can’t afford the payment, then you don’t need to buy the house. Be smart about your decisions and don’t over extend yourself on your house payment.
Stay tuned tomorrow for more from Mortgage Week at Suburban Dollar. Do you have an ARM or Fixed rate mortgage? Why did you/would you consider an ARM loan I would love to hear about it.
The Rest of Mortgage Week:
05/05 – What is a Mortgage Broker
05/07 - Par Rates, Points, and PMI