Best Variable Rate Mortgage

Best Variable Rate Mortgage

A Bamboozling Dilemma: Fixed Rate or Adjustable Rate Mortgage?

A lot of people who plan to buy a house often wonder what kind of mortgage is right for them: an adjustable rate mortgage or a fixed rate mortgage. To be able to determine the suitability of a mortgage type, potential buyers should familiarize themselves with the advantages and disadvantages. This way, they enable themselves to come up with informed decisions.

Depending on the term of the mortgage and a borrower’s financial needs, both the adjustable rate mortgage and the fixed rate mortgage are appealing to various types of homebuyers. But it is essential that homebuyers become aware of the difference between the two kinds of mortgages.

An adjustable rate mortgage, or an ARM for short, is commonly known as a variable rate mortgage. This mortgage features an interest rate linked to an economic index. Interest rates and mortgage payments are occasionally adjusted in keeping with the changes in the said index. The primary interest rate for an adjustable rate mortgage is lower compared to the rate of a fixed rate mortgage, which features an interest rate that remains unchanged for the entire life of the loan. In contrast to the fixed rate mortgage, the adjustable rate mortgage offer borrowers the choice to make an early repayment of the initial principal borrowed without a penalty charge.

A principal reason why you should consider an adjustable rate mortgage is that you may end up with a lower monthly mortgage payment. Because you’re taking a risk with unpredictable interest rates, you are rewarded with an initial rate that’s lower compared to an adjustable rate mortgage. You can consider an adjustable rate mortgage a good option if: you plan to stay in your home for only a few years; you anticipate an increase in your future income; or, the existing interest rate for a fixed rate mortgage is too high.

One disadvantage of the adjustable rate mortgage is that there is a risk that the rates will rise on you, which means that your monthly mortgage payment will increase significantly. It is possible that the payment can get too high that you may have to default on your loan.

On the other hand, a fixed rate mortgage features an interest rate that is fixed for the entire life of the loan, even if the mortgage lender’s interest rate rises and falls in the future. Because the payments are predetermined, homeowners can budget the amount they need to set aside for their monthly mortgage payment. They can also afford to plan their finances for the long-term.

The drawback is that this type of mortgage comes with higher interest rates. Also, with a fixed rate mortgage, lenders often set up a prepayment penalty that dissuades borrowers from paying off their mortgage early or refinancing their mortgage loan with a lower interest rate. This type of mortgage also puts borrowers at a disadvantage when interest rates fall. However, borrowers can shift to a mortgage program that enables them to benefit from lower interest rates. One way to do this is to qualify and pay for mortgage refinancing.

Compared to an adjustable rate mortgage, the fixed rate mortgage is a more attractive choice for borrowers who opt for a long-term plan. The fixed rate mortgage also offers more security for buyers and is best suited for homeowners who wish to keep their houses for a longer period of time.

About the Author

Get more of Matt Peters’ FREE tips and information on Fixed and Adjustable Mortgage Rate at http://www.homemortgageonline.org

I’ve got 80/20 mortgages. What’s the best way to get rid of the 20?

I’m 3yrs into the 20 with 2 more years before it comes due. I haven’t paid extra toward the principle. I’ve got a 5.85% 30yr on the 80 and 9% on the 20. Depending on if I get a good appraisal I can collapse the two into 1 30yr at 6%. I know there are probably a lot of variables but anyone been through this and have some ideas. I don’t have a lot of cash either. Going with the 6% may mean a little higher monthly payments; but I’m thinking I’ve got to do something within two years anyway or I’ll really be in a fix when it comes due. I wish I had a crystal ball and could tell if interest rates are going to be going up or down anytime soon.

A lot has to do with how much gambling you want to do.

Here are a couple of things I would look at if I were you:

1. What is your current total monthly payment between the two loans?

2. What would be the total monthly payment with the new solo loan?

3. The difference between the two monthly payments is the pain level number.

4. Then the question becomes what could happen to make the difference greater or smaller.

Lets say you wait and rates go up to 6.5%, then your differential probably increases…you lost your gamble.

Lets say you wait and rates go down to 5.5% , then it went in your favor…you won your gamble.

But there are wild card issues. I don’t know about your area, but in most areas, homes are decreasing in value anywhere from wee bit to quite a bit.

Here is what can happen from there.

You want to jump on the 5.5% rate (yea, you won) but the rate has gone down because overall conditions have worsened. With the worsening conditions, homes could go down in value even further. What if you can get the great rate but your home won’t appraise high enough to get you out of the second.

Now you’re really stuck because you can’t take out the second and refinance with a new solo loan but you have to take out the second soon. You’re screwed, but you won the interest rate gamble. It’s like getting killed walking across the street while you were in the cross walk, so you were right, but so what since you’re still dead

This is how a good number of foreclosures are occurring. People need to refinance to get out of their second loans (or their adjustable firsts), have good credit but little cash, but their home won’t appraise, so they can’t get a replacement loan. They can’t even sell it to break even. Bingo, they’re in foreclosure with no escape. Nightmare.

The other wild card issue is that lending requirements have risen. Lenders are raising the bar in an effort to not create more bad loans. So rates could be great, your home could appraise, but you no longer qualify because of higher, tougher lending requirements.

Lots of gambles in waiting. If you are planning on staying in that home for more than 4-5 years and enjoy sleeping at night, I’d get the refinance done yesterday.

If value drops, they’ll probably come roaring back over time but nobody knows exactly how long and if you don’t have to sell and you are comfortable with your solo loan that you got in May 2007, all is well.

Rates are very near 40 year lows, so there is more likelihood of rates rising, than dropping.

For you to win the gamble by waiting, everything would have to fall exactly in your favor and in the exact correct time.

Now you’re a smart person, how often has everything fallen in exactly in sync and at the right time in your life, all in your favor? I thought so.

It could happen but you could also be hit by a falling piece of the planet Mars, but the odds are very, very heavily against you.

Hope this helps.
Scott

Variable Rate Mortgage Strategy