ARM vs FIXED RATE
If you are nearing your Adjustable Rate Mortgage (ARM) expiration date, it’s time to review your options. Naturally, the best option is to no longer worry about your rate adjusting every 6 months to 1 year. The only product that offers this solution is the Fixed Rate Mortgage.
The Fixed Rate Mortgage comes pretty much the way it sounds: its a fixed rate interest and is guaranteed not to adjust for the life of the loan. No more worries about the next adjustment or payment increase. The Fixed Rate Mortgage is for homeowners who want a fixed monthly bill and plan on staying in their homes for an extended period of time. Fixed Rate Mortgages are the most common choice for home buyers.
A Fixed Rate Mortgage is useful because if you lock in the rate while its low, you’ll never worry about having to refinance your home. Your payment will be fixed for the life of the loan. If rates were to drop significantly from where you are today, the you could still refinance to the lower rate. Being able to make the decision to refinance because YOU want to, is much simpler than completing a refinance because you don’t know what your rate will be on the next adjustment.
There are some drawbacks to a Fixed Rate Mortgage in comparison to the ARM. In most cases, the fixed rate loan starts off slightly higher than the ARM loan. As an example, you may receive a Fixed Rate Mortgage quote for 4.875% but the ARM quote could be 3.875%. In this example, the ARM is clearly lower but the terms of the ARM may show that you are projected to receive in increase of 2% after the 3rd year. Then if could increase another 1% the following year. So, while the ARM rate is lower to begin with, it will ultimately be higher than the fixed rate product after 2-5 years (depending on the market).
An advantage of choosing a Fixed Rate Mortgage over an ARM is that you can choose the terms. You can get as short as a 10 year term, or as long as a 40 year term. The 30 year program is the most popular for newer home buyers.
Another advantage of the Fixed Rate Mortgage is that in the beginning a majority of your money goes towards interest, but it will balance out and eventually more principal will be applied instead of interest.
So, when comparing your mortgage options between an ARM and a Fixed Rate Product, be sure to look at the entire picture. The ARM always sounds more appealing at first, but in the long run, the Fixed Rate Mortgage offers security and a fixed mortgage payment for the life of the loan.
