Fixed Rate - This standard form of a mortgage has two basic characteristics that do not change throughout the liof the loan: the interest rate and the repayment term. In addition to the principal and interest the lender often collects monthly on the amount needed to pay annual taxes and insurance. This amount can sometimes be known as impound fees or escrow funds, this amount can be determined by taking the cost over the year dived by 12. Although, the principal plus interest payment remains constant over the life of the loan, the amount needed to pay taxes and insurance may vary, resulting in the change in the total monthly payment. The accured interest due on the loan is always paid first, with the balance of the payment allocated to principal, taxes and insurance accordingly. The result of this standard payment format is that the borrower begins to build equity with the first monthly payment.ARM loans generally have a lower interest rate than fixed rate loans, and you therefore have a lower payment. However, there are some cases where the interest rate may be the same or even slightly lower on a fixed rate loan that on an ARM. In these cases, it is always better to choose the fixed rate mortgage.
Fixed Rate Mortgages (FRM) are suitable for homeowners who intent to keep the property for a long time, preferably for the life of the loan. FRM are also good for homeowners who are uneasy about the uncertainty in interest rate trends and the potential increase in future payments that are associated with Adjustable Rate Mortgages (ARM). To accommadate homeowners who do not intent to keep the home for more than 10 years and are uncomfortable with the potential risk of an ARM, most banks offer Hybrid Loans. Hybrid Loans offer a Fixed Rate period for the initial one, three, five, seven, or ten years, followed by an Adjustable Rate for the remainder of the loan term.
You are probably familiar with a fixed rate mortgage. Your parents more than likely had one, as did their parents before them. The major advantage of fixed rate mortgages is that they present predictable housing costs for the life of the loan
This being the most common type of mortgage, consists of one fixed interest rate for the complete term of the mortgage, so you always pay the same monthly payments for the life of the loan. This offers consistency, an advantage for borrowers on fixed or limited incomes.
A 30 Year Loan may be an Adjustable Rate Mortgage or a Fixed Rate Mortgage since both mortgage types can be amortized over 30 years. To ensure you truly are in a fixed rate mortgage, review the Truth In Lending, this document should show no adjustment in payment.
A Fixed rate does offer the most in safety and lack of risk of any loan program. That safety comes with a price, however. The payment on a 30 year fixed mortgage will be the highest payment of any program that you select.
In addition to a 30 year fixed loan, you can get a 15 year fixed rate mortgage. Most people believe that, since the mortgage is paid off twice as fast, the payment must be twice as much. This is simply not the case.
15 year fixed mortgages usually have a lower interest rate than 30 year fixed. Since most of your monthly payment is interest, it only takes a small increase in your principle payment to pay off your loan in 15 years. Your total monthly payment can be as low as 15% more than on a 30 year fixed mortgage.
For example, if you had a 30 year mortgage where you are paying $1,000 per month, a 15 year mortgage may cost only $1,150 per month. The exact difference in payment will depend on your own situation. Contact a trusted mortgage professional if you are interested in seeing what the payment difference is for you.
Considering the fact that the average American homeowner sells or refinances their home every 5 years, that is a major reason why a fixed rate mrotgage is not always the best program for everyone. An adjustable rate mortgage will usually offer a lower rate and a lower payment.
One of the misconceptions about mortgage programs the average borrower has is they truly believe fixed rate mortgages are always best. When you understand the mortgage business you begin to see why this is not always the case. When you plan on refinancing your house in just a few years or selling the home in this time frame you may want to consider one of the Hybrids to keep your payments lower. This can save you money over time. Ask your mortgage broker to show you the difference and compare.
Although your monthly mortgage payment will always remain the same, the principal payment will go up, and the interest payment will go down with time. The longer you remain in the mortgage, the faster you build equity.
The reason your principal and interest change each month is that you are paying interest on the current amount of the loan. Therefore, since the amount of the loan goes down with each payment, the amount of the interest payment also goes down. Since your total principal and interest payment stays the same, your principal payment goes up.
Also, if you pay more on your mortgage each month than you are required, you will build equity faster, in two ways. First, the added payment goes directly to your equity. Second, you decrease your loan amount, which means you pay less in interest, and more in principal for every month, for the rest of the life of your mortgage.
Should I refinance my ARM to a fixed rate - There are benefits and negatives to both a fixed rate and an ARM mortgage, but for the borrower who is thinking about refinancing their ARM into a fixed rate, there are many things to consider. By Refinancing your ARM to a fixed-rate mortgage you will avoid the payment increase when your ARM interest rate begins to adjust. You will also lock into a more stable payment for the term of your mortgage.
If you are in a situation in which you MUST refinance, pay close attention to what is going on in the market. Make sure you are dealing with a savvy and honest loan officer or Mortgage Broker. Sometimes the yield curve becomes inverted, and you can actually refinance into a 30 year fixed mortgage, at a lower or equal rate than a 3 or 5 year ARM!
You need to find what your break even point is for your current loan. Have you already broken even? If not how much more will it cost you to continue in your current loan? Have an honest discussion with a broker to decide what the best course of action is.
In an economic climate where short term rates and long term rates are about the same, it may be better to refinance adjustable rate mortgages into fixed rate loans. Home buyers are willing to share the risks of an adjustable rate mortgage when the adjustable rate is significantly lower than fixed rate mortgages. If such advantage no longer exists, fixed rate mortgage is often a preferred choice.
Many people take adjustable rate mortgages because credit challenges prevented them from having a low fixed rate. If you have made all of your mortgage payments on time and your credit score has increased you may be able to refinance into a Fixed Rate Mortgage without increasing your payments.
If affordability is a determining factor in deciding your mortgage structure, ask your loan officer or mortgage broker if structuring your loan as an Adjustable Rate will give you more flexibility.
When deciding to refinance your adjustable rate mortgage (ARM) into a fixed rate mortgage, you first need to decide how long you think you will be in your home. If you are in the second year of a 5 year ARM, and only see yourself in the house for another 2-3 years, then you may want to wait until it is absolutely necessary to make the change. Your mortgage broker can advise you as to what the market may do, but they will not know what is in store for years to come. Concurrently they will also not know the number of years you will be in the home, along with any changes in your life that may require you to move.
