House Refinance Center
Adjustable Rate Mortgage or Fixed Rate Mortgage?
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Fixed Rate
Mortgage: Still The
Favorite Loan With
Americans
Buying a home in the current housing market
could be a challenge. After you have decided
on that one special house you now have to
focus on the type of mortgage that would
satisfy most of your needs.

The fixed rate mortgage is still the favorite with
the majority of Americans. It is simple to
understand. Your rate stays the same and
your mortgage payments likewise. But the
question with your fixed rate mortgage is
whether you should go long or go short.

The longest term I have seen was 40 years.
Many lenders have now discontinued this
product. This leaves us with the 30 year fixed
rate mortgage or the 15 year fixed rate.

Pros: 15 year term.

Lower interest rate: Traditionally the rate for a
15 year fixed is lower than for a 30 year fixed.

Your equity in the property builds up quicker.

Inflation protection: You will not be affected by
increases in the cost of living because your
interest rate and payment stay the same for
the duration of the loan, or until you refinance
of sell the house.

Cons: 15 year term.

Higher mortgage payments because of the
shorter amortization period.

You might have to settle for a smaller more
affordable house because of the higher
mortgage payments.

There are two more features of fixed rate
mortgages that you should know about. There
are interest only and biweekly payment
mortgages.


Interest only fixed rate.

With an interest only fixed rate mortgage you
pay interest only. You have no equity from
mortgage payments. Your initial down payment
and the increase in value due to market
conditions is all the equity you can count on.

Bi-weekly payment fixed rate.

If your primary objective is to pay off your
house before the term expires then the
bi-weekly payment option is the plan for you.
You will be making 26 payments during the
year. This amounts to one extra mortgage
payment each year. In the long run you save
thousands of dollars on your mortgage and
reduce the payoff time.
Buying A home
With An
Adjustable Rate
Mortgage (ARM)
An adjustable rate mortgage (ARM) is not
for everybody. The rate fluctuates and
might change each month. This in turn
causes your monthly mortgage payment to
change as well, usually for the worse.

The following terms will help you get a grip
on the ARM, and hopefully will guide you in
your decisions.

Initial interest rate.

This is the beginning interest rate on an
ARM.

The adjustment period.

This is the length of time that the interest
rate or loan period on an ARM is
scheduled to remain unchanged. The rate
is reset at the end of this period, and the
monthly loan payment is recalculated.

The index rate.

Most lenders tie ARM interest rates
changes to changes in an index rate.
Lenders base ARM rates on a variety of
indices, the most common being rates on
one-, three-, or five-year Treasury
securities. Another common index is the
libor (London Interbank Offered Rate).

The margin.

This is the percentage points that lenders
add to the index rate to determine the
ARM's interest rate.

Interest rate caps.

These are the limits on how much the
interest rate or the monthly payment can
be changed at the end of each adjustment
period or over the life of the loan.

Initial discounts.

These are interest rate concessions,
sometimes referred to as teaser rates.
They are used as promotional aids and
are offered for the first year or two of the
mortgage. They reduce the interest rate
below the prevailing rate.

Negative amortization.

This means the mortgage balance is
getting bigger. This happens whenever the
monthly mortgage payments are not large
enough to pay all the interest due on the
mortgage. This may be caused when the
payment cap contained in the ARM is low
enough such that the principal plus interest
payment is greater than the payment cap.

Conversion.

The agreement with the lender may have a
clause that allows the buyer to convert the
ARM to a fixed-rate mortgage at
designated times. Always check to see if
there is a fee or payment for this option.

Prepayment.

Some agreements may require the buyer
to pay special fees or penalties if the ARM
is paid off early. Prepayment terms are
negotiable so don't just accept what is
handed to you.

An ARM makes the monthly mortgage
payments lower in the initial years. ARMs
come as 3/1, 5/1, 7/1 and 10/1 loans. The
first number is the number of years for the
fixed rate portion and the second number
is how often the rate will reset. For
example, a 3/1 ARM will give the borrower
a fixed rate for the first 3 years, then
adjusts to the ARM every year thereafter.
'An ARM gives low payments in early
years in exchange for the risk of higher,
fluctuating rates later'.
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ARMs Are Worth A Look
Adjustable rate mortgages are making a
comeback. As of June 30, 2011 the rate was
at a record low of 3.22% for 5 years. Gone
are the fancy creative loans that got us into
the housing mess. What you get now is plain
vanilla ARMs. No frills.
Watch the slideshow.