When mortgage rates are low, a fixed rate mortgage is the best bet for many buyers. Over the next five, ten, or thirty years, interest rates are more apt to go up than further down. Even if rates could go a little lower in the short run, an ARMs teaser rate will adjust up soon and you won’t gain much if you plan to stay in the house more than a few years (the broker can tell you your break-even point). In the long run, ARMs are likely to go up, meaning many buyers will be best off locking in a favorable fixed rate now and not taking the risk of much higher rates later.
Keep in mind that lenders not only lend money to purchase homes; they also lend money to refinance homes. For example, if you take out a fixed rate loan now, and several years from now interest rates have dropped, refinancing will probably be an option.
Many entities, including banks, credit unions, savings and loans, insurance companies and mortgage bankers make home loans. Lenders and terms change frequently as new companies appear, old ones merge and market conditions fluctuate. To get the best deal, it’s a good idea to compare loans and fees with at least a half a dozen lenders. Because many types of home loans are standardized to comply with rules established by the Federal National Mortgage Association (Fannie Mae) and other quasi-governmental corporations that purchase loans from lenders, comparison shopping is not difficult. Be sure to ask for the same size, type, and length of mortgage — such as a 30-year fixed term mortgage for $300,000 — so you’re comparing apples to apples.
With a fixed rate mortgage, the interest rate and the amount you pay each month remain the same over the entire mortgage term, traditionally 15 or 30 years. A number of variations are available, including five- and seven-year fixed rate loans with balloon payments at the end. With an adjustable rate mortgage (ARM), the interest rate fluctuates according to the interest rates in the economy. Initial interest rates of ARMs are typically offered at a discounted (“teaser”) interest rate that is lower than the rate for fixed rate mortgages. Over time, when initial discounts are filtered out, ARM rates will fluctuate as general interest rates go up and down. Different ARMs are tied to different financial indexes, some of which fluctuate up or down more quickly than others.
Getting preapproved before shopping for a home is a smart move for serious homebuyers because it shows sellers that you come to the negotiating table ready to complete the transaction.
A preapproval indicates that a lender has taken a detailed look into your financial background and has committed to lend you a certain amount of money. Because preapproval includes a credit check, it’s more powerful than a prequalification letter, which generally only estimates a monthly payment within your budget based on information you’ve provided.
A fixed-rate mortgage locks in your low interest rate for the life of your loan even as rates rise. This stable monthly payment is typically best for homeowners who plan on staying in their home for many years.
An adjustable rate offers a lower initial monthly payment option than fixed-rate mortgages typically offer. The interest rate adjusts as interest rates rise or drop after an initial payment period. People who plan on owning their home for a few years or believe interest rates may fall in the future often select adjustable-rate mortgages.
The biggest reason people choose a fixed rate mortgage can be summed up in one word: predictability. You can count on your rate and monthly payment to stay the same for the entire life of your loan. That makes it easier to manage your budget and it’s a smart choice for those who plan on staying in their homes for five years or longer.
September 9th, 2009 at 9:52 am
[...] Read the rest of this great post here [...]
September 9th, 2009 at 10:05 am
[...] news by Derrick Ross US Fidelis – Ran payment too early and caused my mortgage pmt to … [...]
September 9th, 2009 at 10:46 am
[...] Derrick Ross wrote an interesting post today onIs Fixed or Adjustable <b>Rate Mortgage</b> Better?Here’s a quick excerpt [...]
September 9th, 2009 at 11:21 am
[...] See the original post: Is Fixed or Adjustable Rate Mortgage Better? [...]
September 11th, 2009 at 8:24 am
Fixed would be good as you said to predict the situation. People will know how much they’ll need to pay and so can control their finance