Fixed Versus Adjustable Mortgage Rates

Buying a home is one of the biggest decisions most people make in their lifetime. It is a huge investment and for many the idea of committing to a mortgage (one that could last up to 30 years to pay off) is a stressful experience. When buying a first home there are many factors to consider. What type of house do you want? How much can you afford? Will you be able to build equity in the current housing market? However, one of the biggest challenges for many new home buyers is understanding the various mortgage options and how the constantly fluctuating interest rates can affect them. Here’s how to understand the difference between fixed rate mortgages and adjustable rate mortgages.

Fixed Rate Mortgages
Fixed rate mortgages offer the buyer a consistent rate for the period assigned to the mortgage. For example, if you lock in at a 30 year mortgage your rate will not increase for the life of your loan. The benefit of this type of mortgage is that it makes it easier for the borrower to budget monthly expenses because payments remain the same every month. These types of mortgages are easy to understand for the new home buyer and are good for borrowers who are at the upper end of their budget and can’t afford any surprises. Fixed rate mortgages are also good for home buyers that plan to stay in their home for the duration of their mortgage. However, fixed rate mortgages don’t protect buyers if home values drop. In this scenario payments can become overvalued as equity falls behind.

Adjustable Rate (ARM) Mortgages
In comparison, monthly payments of adjustable rate mortgages go up and down each time the rate resets. Adjustable rate mortgages reflect short-term rates and are usually lower than the longer term mortgages. ARMs allow home buyers to purchase a larger more expensive home because interest rates are lower. The lower monthly payments are good for borrowers who want to take advantage of lower rates but have room in their budget if rates increase. However, many ARM loans begin with teaser rates that are below the indexed rate and in the long term may increase as rates reset to a market rate.

Let’s look at an example. Monthly payments on a $400,000 loan for a 30 year fixed rate mortgage at 4.31 percent would be $1981.84 compared to a 1 year adjustable rate mortgage at 3.00 percent, which would be $1686.00 resulting in a savings of approximately $300 per month.

Most first time home buyers rush into the housing market when rates are low without really understanding what they are getting into. Mortgage rates are important but borrowers have to consider the overall cost of home ownership including things such as the amortizaton period, payment options, and how the different types of mortgages can effect payments over time.

Often many people think that taking on a longer mortgage keeps repayments low. However, there is significantly less total interest repayable on a 15 year term than a 30 year mortgage.

Buying a first home can be exciting but it is also very scary. Especially for first time buyers who don’t have a clear understanding of interest rates and various mortgage products. Although there is a lot of stress that comes with purchasing a first home, it is a great investment and one that you will rarely regret as long as you ensure you know what you are getting into.

The ABC’s of Getting a Home Mortgage Loan

Conventional wisdom has it that there could not be a better time to capitalize on attractive low mortgage interest rates and rock bottom real estate market prices. That being said, here are some very important steps to consider for those in the market to purchase a new home. The first and foremost consideration is to determine whether you are, in fact, in the financial position to buy a home. It is therefore a good idea to check your credit report and FICO (Fair Isaac Corporation) score beforehand to see if you have the creditworthiness to move forward in purchasing a home.Credit Report and Scoring

Your FICO score is a complex credit-scoring formula that assesses the risk that a borrower may default on a loan. It is derived from the three credit reporting agencies (Experian, TransUnion, Equifax) that appear on your credit report and will be indicative of the interest rate that you will pay on your mortgage loan. The good news is that consumers are offered one free copy of their credit report per year, but the bad news is that the actual FICO scores are not included in these free reports. Thus you will still be required to pay for this scoring which is highly recommended to see exactly where you stand. At the time of this proactive investigation you may want to “clean up” your credit to assist in accelerating your FICO score to facilitate getting the best deal on your home mortgage loan.

In general, FICO scores at 640 or better are considered candidates for prime-rate loans, while those under 640 are considered high risk. To get top-tier mortgage rates a borrower needs to have a FICO of at least 740. When you decide to move forward in buying a home your mortgage broker or lender will order an updated credit report to get your FICO, in addition to having you fully document your income, assets and liabilities. This process will serve to “pre-qualify” you for a home mortgage loan.

Lenders will look at this information and determine the amount of debt you can reasonably handle given your income, employment history, and credit history. Based on their perception of this information, as well as specific underwriting policies, lenders may extend credit to you although your FICO score is low, or may even decline your request for credit although your score is high. In the unfortunate event that you are declined by a particular lender you may want to shop around.

Choosing a Mortgage Professional

There are several options available to you in wisely choosing who will assist you in obtaining the best mortgage rate and loan product on the market. Your choice of lender and type of loan will influence not only your settlement costs, but also the monthly cost of your mortgage loan. There are many types of direct lenders you can choose from such as: banks, savings associations, mortgage companies and credit unions. You may decide to work with either a mortgage broker or one of these direct lending sources. Although as mentioned, being declined by a direct lender could surely become a determining factor in the need to shop around.

Comparison shopping is tantamount to the process of getting a home mortgage loan and a mortgage broker can indeed be instrumental in serving as a trusted partner to help you find the loan that meets your needs. Think about it; a mortgage broker deals only in mortgages and therefore has access to more loans than direct lenders and this can certainly be a critical factor in making the right choices. The individualized attention and flexibility of a mortgage broker is superior to a direct lender because interest rates change on a daily basis. Consequently, a broker can start a loan with one lender and swiftly switch gears to another lender if the rates are better!

By all means be sure that your mortgage professional guarantees your rate with a “rate lock” of a stated interest rate for a specific period of time, usually 30 days. This ensures that even if interest rates rise you will still receive the “locked” rate.

Types of Mortgage Loans

For borrowers that may be unable to meet today’s strict lending requirements, FHA (Federal Housing Administration) backed loans are an alternative. These loans require a minimum down payment of 3.5 percent however borrowers will pay an insurance premium for Private Mortgage Insurance (PMI) as well as a slightly higher interest rate. The down payment required with loans other than FHA may vary according to the market, borrower and property type.

There are both fixed and adjustable rate mortgages available to borrowers and your mortgage professional will explain and advise which may be suitable for you. They will further discuss with you the associated costs that may include broker origination fee, processing and application fees, points, pre-paid items and title charges.

All lenders are required by federal law to provide a Good Faith Estimate of the costs of your loan and a Truth-In-Lending Disclosure within three days of receiving your loan application. Read this carefully with your broker to clearly understand what goes toward principal and interest as well as the cost of mortgage insurance and property taxes to know exactly how much your monthly payment will be.

Here are the ABC’s to getting a home mortgage loan:

a) Be pro-active; check your credit report and work on improving FICO if necessary.
b) Choose your mortgage broker or direct lender wisely to shop the best deal.
c) Your mortgage broker will thoroughly research and shop loans and rates, disclosing mortgage payment and associated costs with you.
d) You will then decide which loan is best for you. Do not forget to lock in your rate!

The American Dream

It is still an integral part of the American Dream to own a home and the truth is; we may never again see the low interest rates and real estate prices that are reflected in our present economy. Buying a home can be a significant investment opportunity and one of the most important decisions you will ever make. Conclusively, it pays to be wise in choosing a trusted mortgage professional who will partner with you in shopping around to find the right home mortgage loan that will reflect your dreams as well as realistic financial goals.

Types of Mortgage Loans in the Market

A mortgage loan is one which is taken from banks, private mortgage brokers or online brokers. These loans are taken by pledging owned property in order to buy another residential or commercial property. They are sometimes taken to even refinance another loan. Mortgage loans generally extend over a period of 15 to 30 years. The payment amounts are distributed depending on the exact number of years, the type of mortgage and the decided rate of interest. The property that is purchased serves as security in case of a debt. In case the borrower defaults, in terms of the payments, the lender can sell the property by using the foreclosure process.

In order to be sure that the borrower can make the payments, there are a few key points that lenders examine beforehand. The main aspects considered are the down payment, monthly income and the credit score of the borrower. The down payment amount bring the risk of the lender down in case of defaults, the monthly income will reflect the borrowers capability to make monthly payments and the credit scores show the risks of lending to the borrower. Higher the credit score lower the risk for the loan.

Types of loans

• Interest-only mortgage: This type of a mortgage loan requires the borrower to pay only interest for a specified time period. After this period the loan is usually changed and there is a new mortgage amount. This new amount will be repaid with principal payments plus the left over interest amounts.

• Balloon mortgage: This mortgage gives the borrowers a lower rate for a fixed period. The period usually varies between 3 to 10 years. Once this fixed period passes, the borrower has to pay the entire principal amount.

• Sub-prime mortgage: A sub-prime mortgage is meant for people whose credit score is low. This means the risk for the lender is higher. In order to compensate for this, the interest rate and monthly payments are also higher. Lenders usually earn good money by giving out these loans. But if the borrower pays the due amount before the time expected, a prepayment penalty has to be paid by the lender.

• Fixed rate mortgage: These mortgage loans have a fixed rate over the loan period. They are very popular as rises and falls in interest rates do not influence these rates. No matter what, the interest rates remain the same in these mortgages.

• Home equity line of credit: These are also known as HELOC’s. The mortgage rates are variable in line with the prime rate. This lasts for 3 to 10 years after which the borrower is required to pay back the entire principal amount like in balloon mortgages.

• Adjustable mortgages: This is a mortgage loan where there is a fixed rate for a specific time period. After completion of this time period the rate of interest is adjusted according to the fluctuating market rates. These loans are the most commonly taken loans after fixed rate mortgage loans.