What are the advantages and disadvantages of adjustable rate versus fixed rate mortgages?

Fixed Rate Advantages: No payment surprises, peace of mind.


Fixed Rate Disadvantages: Higher interest rate, higher payments.





ARM Advantages: Lower interest rate, lower payments.


ARM Disadvantages: You have no idea what your payment will be when it adjusts.





The way to tell which one is best for you is to figure out how long you plan on staying in the house. That's the main factor. If you are staying for 3 years, then a 3-year adjustable rate mortgage (ARM) is probably your best choice. You can get the best interest rate, keep your payments lower, and build up equity faster. If you are staying in the house forever, you will want a fixed-rate loan.What are the advantages and disadvantages of adjustable rate versus fixed rate mortgages?
Simple, non-complex loan. - Fixed Rate does not change rates and the principal and interest payment does not change. You know what your payment is except for those pesky taxes and insurance if you escrow them. The market rate today is just as low as adjustable rate mortgage (ARM) loan rates.





A few years ago - if you were not staying in your house for more than 2,3,5 years, ARM rates were significantly lower than fixed rate loans by 1% or more. Being fixed for 2-5 years, you were safe during your stay in the home and woud sell before your rate changed getting the benefit of the lower rate.





Today - in most markets the fixed rate loans and 1 yr ARM loans are almost the same interest rate so it makes little sense to take an ARM out even if you are not planning on staying in the home for an extended time period. Alt-loans are even higher on interest rates. Why take out a loan at almost the same rate as a fixed rate loan and have the interest rate change after 2 years? The interest rate could have a potential to go up anywhere from 2% to 3% on average for the first change. Most rate adjustments do adjust the mortgage payment each time the interest rate changes to prevent the payment from not being enough to pay the full interest due amount (negative amortization-very bad). Then the interest rate could change every 6 months or every year depending on the loan terms. The rate will be based on an index (LIBOR, FFR) plus a margin of a fixed % such as 6.5. Usually there is a life cap on the interest rate increase of no more than 6% added to the original rate.





Hope this helps.What are the advantages and disadvantages of adjustable rate versus fixed rate mortgages?
Advantages of an adjustable rate:





1. Allows you to buy a more expensive home because the interest should be lower than a fixed rate.


2. Is good if you have a job that you know you will get guaranteed pay raises or bonuses that will cover the higher payment when it adjusts upwards.


3. Is good if you plan to own a less than seven years and plan to sell it before the ARM adjusts.





Disadvantages of the ARM


1. Allows you to purchase more of a home than you would normally qualify for.


2. Must be prepared when to cover the payment when the rate adjusts upwards (can be up to 5% in one year).


3. Must be disciplined with your finances.





Fixed rate advantages:


1. Gives you peace of mind knowing what your monthly payment will be.


2. Good for those who struggle with a budget.


3. Good idea if you plan to own the home for more than 7 years.





Disadvantages


1. Does not allow you to purchase more of a home while factoring in guaranteed pay raises and bonuses.
Advantage lower rates which equal lower payments. Disadvantage when the initial rate expires rate adjustment could be as much as 2%, thus forcing you to refinance. It just depends on your situation as to which scenario would best fit your needs.
It’s still possible to keep rates as low as possible.





When interest rates are on the rise, you're probably looking for ways to keep yours at a manageable level. We have more than 2,000 loan products and programs — developed with your individual needs in mind.





Here are just a few ways you can take control of your mortgage interest rates, with loan products that offer initial fixed-rate periods:





• 30-year fixed loan, with an interest only option for the first 10 years


• 5/1, 7/1 or 10/1 Arms, with interest only option


• MTA Power ARM, based on the Treasury index, which has traditionally shown a monthly average fluctuation of less than 1%! Plus, it offers four payment options.





Historically, interest rates tend to fluctuate downward every five to six years. So, these loans will give you ample time to “ride out” any further rises. Then, just refinance when the time is right.





The main reason somebody would do an adjustable rate is to keep their payment down. Its a great loan for somebody who knows they're not going to stay in the same house for more then 5 years.





Email me if you have any more questions, Ive been in the mortgage industry for 6 years


denielle.hass@americanhm.com
Mortgage rates change over time, and many lenders give you one of two options, adjustable and fixed. Adjustable rates change with the times, giving you the risk of the average rates you pay being either higher or lower. A fixed rate takes the current rate mortgages are at, and keeps that rate until the mortgage is payed off.