Adjustable Rate Mortgages vs Fixed Rate Mortgages
Adjustable Rate Mortgages vs Fixed Rate Mortgages. Buying a home can be an exciting and stressful time for anyone. While you may be excited at the prospect of owning your own home, especially if it is your first home purchase, the idea of choosing between all of the many different types of mortgages may leave you feeling confused and apprehensive.
{getToc} $title={Table of Contents}
Adjustable Rate Mortgages vs Fixed Rate Mortgages
Buying a home can be an exciting and stressful time for anyone. While you may be excited at the prospect of owning your own home, especially if it is your first home purchase, the idea of choosing between all of the many different types of mortgages may leave you feeling confused and apprehensive.
Two of the most common choices you’ll find in the mortgage market are adjustable rate mortgages and fixed rate mortgages. Fixed rate mortgages are the most traditional type of home mortgage, offering a fixed interest rate that does not change throughout the life of your loan.
There are a number of important advantages associated with this type of mortgage. First, if you are budget conscious, this type of mortgage will give you the peace of mind in knowing that your monthly mortgage amount will not change. You can budget the remainder of your financial obligations without worrying about a changing mortgage payment to throw things off.
Adjustable Rate Mortgages vs Fixed Rate Mortgages. An adjustable rate mortgage works differently. With this type of mortgage you may be able to obtain a lower interest rate than would normally be available with a fixed rate mortgage. However, the interest rate is not fixed.
This means that your monthly mortgage rate may change as interest rates change. With such a mortgage you may not be able to regularly plan your budget due to such fluctuations. While there is usually a cap that will keep the interest rate from fluctuating too much, even a little fluctuation can be too much for some homeowners.
Of course, there is also the possibility that interest rates will drop and if that is the case, because your mortgage is adjustable, your monthly payments will drop right along with the interest rate.
When deciding whether a fixed rate or adjustable rate mortgage is your best choice, you need to give thought to several factors. Ask yourself whether it is more important to be able to plan your monthly budget without wondering whether your mortgage will fluctuate or whether you would prefer to receive a lower interest rate in the beginning of your mortgage.
Remember that if you decide you would like to obtain the advantages of both you do have other options available to you. For example, if you feel the interest rate offered to you on a fixed rate mortgage is too high but you want the security of not having to worry about a fluctuating interest rate you can always buy down your interest rate by purchasing points.
This will mean more up front costs for your mortgage; however, it may be worth it to decrease the interest rate, especially if interest rates are currently high.
Adjustable Rate Mortgages vs Fixed Rate Mortgages. If you do elect to go with an adjustable rate mortgage make sure you understand exactly how high the rates may go as well as ensure you have enough ‘wiggle’ room in your monthly budget to cushion increases if they occur. This may help to keep you out of a tight spot and possibly losing your home due to rising interest rates.
Adjustable Rate Mortgages and Negative Amortization
For many borrowers, adjustable rate mortgages are an attractive means of qualifying for a home. Fewer borrowers realize the potential negative amortization problems these loans can create.
Adjustable Rate Mortgages
Adjustable rate mortgages are very popular with home buyers. The popularity arises from the fact the initial interest rate on such loans is typically much less than one finds with fixed rate loans. As a result, home owners can squeeze into homes that they might not otherwise be able to afford with fixed rate mortgages.
The potential risk with adjustable rate mortgages is well known. A borrower runs the risk the interest rates will increase over the years, resulting in financial hardship when month mortgage payment amounts go up. If the rates and payments go up to much, the borrower can run into serious problems trying to make payments and may even lose the home.
Adjustable Rate Mortgages vs Fixed Rate Mortgages. To overcome the fear of rising rates, many lenders use caps on rate increases to entice home owners. These caps essentially limit the amount the monthly payment can increase for any fixed time period. For many loans, the period is one year and the rate increase is one percentage point. While this makes borrowers feel more secure, there is one little thing lenders fail to point out.
Negative Amortization
On many adjustable rate mortgages, the caps apply only to the monthly payments due on the loan. The caps do not apply to the actual interest rate being charged on the loan.
This situation leads to a financial disaster wherein you are making the monthly payments, but actually seeing the principal of your loan increase. This situation is known as negative amortization and should be avoided at all costs.
Negative amortization is best explained using good old credit cards for an example. If you have credit card debit, and everyone does, you know that making the minimum monthly payment may not make a dent in the total balance.
In fact, it may be less than the interest charged for the month. This becomes apparent when you receive the next bill and your balance has increased! Welcome to the world of negative amortization.
Adjustable Rate Mortgages vs Fixed Rate Mortgages. On an adjustable mortgage, you need to read the fine print to full understand how any caps apply to your loan. Whatever you do, try to stay away from negative amortization whenever possible.
Adjustable Rate Mortgages- Time Bombs Ticking
Over the last few years, thousands and thousands of homeowners have financed or refinanced their homes with ARM's, Adjustable Rate Mortgages.
ARM's are mortgages that are tied in to lower interest rates in the beginning so that many homeowners can afford their monthly payments. As long as interest rates stay even or go lower, the home owner is fine.
The danger comes when interest rates start to rise. Monthly payments can go up hundreds of dollars when the interest rate/payment terms come into effect.
That danger is now. Interest rates have been going up as The Federal Reserve has raised rates for the 15th time in the last two years. And, it doesn't look like rates are going to stop going higher anytime soon.
As these mortgages reset to higher rates and payments, many of these ARM homeowners are going to be in a financial bind. Many may even lose their homes.
Adjustable Rate Mortgages vs Fixed Rate Mortgages. According to the Mortgage Bankers Association at the end of 2005, some states such as Michigan, Missouri, Tennessee and Alabama have as many as 20% of the ARM homeowners behind by thirty days or more.
Foreclosure proceedings usually start when a homeowner is ninety days late. Hopefully, these homeowners will get refinanced before it is too late.
If you have an ARM, you should look at your finances to be sure you will remain solvent in these upcoming times. How high can your monthly house payment go? Will you be able to afford it? Talk to a financial adviser and determine if refinancing to a fixed rate is the best way for you to go. I believe locking in a fixed rate is the safest decision you could make at this moment in time.
May You Like : A Quick Guide to Mortgages and Quick Guide to Remortgage
Adjustable Rate Mortgages vs Fixed Rate Mortgages. There are many mortgage companies that will look to provide refinancing options for you. Unfortunately, many of these companies may be much more stringent in regards to your credit worthiness. That is, it may be much harder to borrow that money now than when you initially purchased your first or second mortgage. You will never know unless you try … and the clock is ticking.
#loans #mortgage #fixed #adjustable #secured #home #house #interest #debt #repayment #loan #adjustable rate mortgages #negative amortization