Fixed Rate Mortgages Versus ARM

Gustan Cho Associates

Fixed Rate Versus Adjustable Rate Mortgage

If you are a first time home buyer or even a seasoned veteran home buyer, applying for a mortgage loan can be a very stressful process and most likely, you will have a lot of questions.  Most consumers may have a total of half a dozen mortgage application process in their lifetime, if that.  Most do not remember the last time they went through the mortgage approval process and even if it has been a few years ago, there has been many changes in mortgage lending guidelines that even the majority of licensed mortgage loan originators only know a fraction of the rules and regulations in mortgage lending. Depending on the mortgage loan borrower’s goal, there are differences that may or may not benefit in choosing fixed rate versus adjustable rate mortgage. With fixed rate versus adjustable rate mortgage, adjustable rate mortgages normally have lower mortgage rates than fixed rate mortgages.

One of the major factors a mortgage loan borrower should consider is whether to get a fixed rate mortgage versus an adjustable rate mortgage , commonly referred as an ARM.  Sometimes an adjustable rate mortgage may be better for you than a fixed rate mortgage depending on your goals on how long you intend on living at your new home purchase or even your current home if you are planning on refinancing.

 Adjustable Rate Mortgages

First time buyers who intend on buying a starter home and intend on moving after 5 to 10 years, an adjustable rate mortgage may be a better option for them.  For example, many first time home buyers may purchase a condominium unit or small townhome as their first home and may intend on buying a larger home once they get married or those married couples who intend in having children in the future and may want to upgrade to a larger single family home.  In situations like these, an adjustable rate mortgage may be a better fit for them.  Adjustable rate mortgages have lower interest rates during the fixed rate period and adjusts after the fixed rate period is over and can change depending on the index the adjustable rate mortgage is based on.  Adjustable rate mortgages are 30 year mortgage loans.  The most common adjustable rate mortgage is the 5/1 ARM where the mortgage rate is fixed for the first five years of the 30 year loan program and adjusts every year for the remaining 30 year period.  The adjustment rate is the index plus the margin.  The margin is a fixed rate and the index changes depending on the index such as the CMT, Libor, COFI, or other index the mortgage lender based the mortgage loan under.  There is caps on adjustable rate mortgages where in the event the index sky rockets, there is cap where the rate cannot exceed.  Your mortgage loan originator can explain how the fixed rate period, the adjustment rates, and the caps work.

Fixed Rate Mortgages

Fixed rate mortgages are mortgage loans that the interest rate will remain the same for the 30 year term of the mortgage loan.  Fixed rate mortgage loans offers security and stability to the mortgage loan borrower where they are rest assured that the mortgage principal and interest will never change during the 30 year term of their mortgage loan.  Property taxes and homeowners insurance can change and increase over the period of time, however the principal and interest will remain the same for the term of the 30 year term of the mortgage loan.

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