DIFFERENCES BETWEEN FIXED AND ADJUSTABLE RATES |
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One of the most common questions a Certified Loan Broker answers
is, "should I choose a fixed or adjustable rate mortgage
(ARM)?" The answer depends on many
different factors including your income at the time of qualifying, the lender
you are working with, current market conditions and how long you plan to stay
in the house. |
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Lets talk about your income first. Many first time buyers who are in the beginning stages of their
careers will choose an adjustable rate over a fixed rate. The main reason is that, while the
interest rate on the adjustable will likely increase over the coming years,
the borrowers level of income can outpace the increased monthly
payments. For this reason, adjustable
rates tend to be the loan of preference for new college graduates who are
beginning work in the field they studied.
On the opposite end of the spectrum are high-income borrowers and real
estate investors. These people tend
to prefer adjustable rates because of the opportunity to make reduced monthly
payments. High-income borrowers will
then either invest the difference between the fixed rate and ARM payments, or
use the starting period when the rate is very low to apply large amounts of
money to the principle balance. This
will enable them to pay off the loan faster and minimize future payment
increases since they will be financing less money. |
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Because of the lower initial interest rate, adjustable rates result
in a lower mortgage payment than the standard fixed-rate mortgage. This lower monthly mortgage payment can
assist a borrower with high debt ratios in qualifying for a larger mortgage. This allows a borrower to increase their
purchasing power in order to buy a more expensive home. |
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If your income is not an issue, the next thing to consider is the
lender that you choose for your loan. Some lenders actually prefer to write
adjustable rate loans because, over the long run, it will provide them with
more interest income. Because there
is an additional profit in the loan, ARM lenders may make it easier for you
to qualify. This is where your
Certified Loan Broker can be particularly helpful. Because Certified Loan Brokers work closely with many lenders,
they know which lenders prefer to do fixed or adjustable rate loans and can
steer your loan in the proper direction. |
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Another issue to consider is the current real estate market
conditions. When interest rates are
down, many lenders are apprehensive to offer ARMs because it is more
difficult to find investors. The
opposite is also true when interest rates are higher. This is also an area where a Certified
Loan Broker can be particularly helpful since they are actively engaged in
the real estate market and know the current trends. |
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The last issue to consider in deciding between fixed and
adjustable rates is how long you intend to occupy the property. As a general rule of thumb, most people will
be better off with a fixed rate if they plan to be in the property for more
than five years. At that point, your
interest rate for an ARM will usually have increased substantially so your
payment will be much higher than if you had taken a fixed rate. On the other hand, if you are planning to
stay less than 5 years, then the thought of buying 30-year money is probably
not very appealing. Also, as we have
already discussed, if you put extra money to principle when your interest
rate is low it will help to keep large payment fluctuations in check. You should also consider that adjustable
rate mortgages have built in safety measures known as "caps" that
will help limit how high your interest rates can rise per year. Most adjustable rates are structured so
that the annual interest rate cannot rise by more than 2 percent per year,
although some loans have caps that are even more conservative. Other loans will not regulate the interest
rate at all but instead limit how high the payment can rise each year. You should consult with a Certified Loan
Broker to help you determine if a fixed or adjustable rate loan is right for
you. |