Many mortgage loans have either a fixed interest rate or an adjustable interest rate. With a fixed-rate mortgage, the interest rate never changes and your payments remain stable throughout the life of your loan until your house is paid off. With an adjustable-rate mortgage (ARM), the interest rate changes at regular intervals — usually once every year — based on a formula that uses a market index. For most ARM options, rate adjustments begin after an initial period — usually between two and ten years — during which the rate is fixed.
A fixed rate is usually best if you plan to stay in your home for the long term and are buying at a time when rates are relatively low. An ARM is usually best if you plan to move before the rate adjustments begin, or if you are buying when rates are relatively high.
For help deciding which option is best for you, contact your local mortgage professional Michael R. Byrne at 1-800-999-2489 x7972 or mbyrne@gfhomeloans.com for a free consultation to decide whether or not a fixed-rate mortgage or an ARM is best for you.Traditionally, a borrower who managed their credit well and used an adjustable rate mortgage could save many thousands over the life of their loan in comparison to a fixed rate mortgage. Since early 2006 the US economy has been experiencing a "yield curve inversion". Short term interest rates have risen above long term rates meaning that a fixed rate mortgage is temporarily the best option all around. However, all indications are that at the end of 2007 short term rates have started going down and ARMs may become a viable option again.
Right now, fixed rates seem to make more sense than adjustable rate mortgages. This is because short term money and long term money costs are about the same. Many folks right now have adjustable rate loans that recently adjusted upward and are encountering financial difficulties.
Life can throw you curveballs at any given moment. Even if you think you're going to live in your home forever or for a short time, you can never go wrong with a fixed interest rate.
When considering an adjustable rate mortgage, ask your broker if you can get a lower margin. When your rate does adjust following the fixed intro period, your interest will be determined by an index which adjusts and a margin which is set in your contract. A lower margin may cost a little up front, but can help hedge your bet against rising interest rates compared to the fully indexed rate you might have been facing.
If you are considering an adjustable rate mortgage, then when you make sure that your pre-payment penalty does not exceed the fixed period of your loan. Example: If you plan on only living in the house for 2-3 more years and you select a 3/1 ARM, you probably do not want to have a pre-payment penalty that lasts for 5 years.
Something that you will want to watch out for are the rate differences between fixed rates and adjustable rates before taking on an adjustable rate mortgage. At different times there can be quite a significant gap between fixed and adjustable rates, while at other times the gap can be extremely tiny. Therefore, it would not make sense to go with a 5 year ARM loan instead of a fixed rate mortgage if the rate difference is only roughly an .125% or so. Pay attention and ask your mortgage professional to show you both a fixed and an adjustable rate in order for you to make the best decision as to what is best for you and your situation.
