Fixed or Adjustable?
October 12, 2011When borrowers are looking to refinance their current mortgage or even purchase a home, it’s important to consider all options. With current 30-year fixed interest rates invthe 4% range, an adjustable rate mortgage can carry a rate in the high 2% to low 3% range.
So what’s the difference and what more do you need to know?
A “fixed” interest rate is just that – fixed – meaning it doesn’t change throughout the term of the loan. Fixed is considered a safe choice because the principal and interestvportion of the mortgage payment will remain unchanged through the entire term of the loan. Although interest rates vary depending on market conditions, these loans do carry a higher interest rate than an adjustable rate mortgage.
An adjustable rate mortgage – also known as an ARM, can often offer an interest rate up to 2% less than a fixed rate mortgage. With the rate reduction comes risk. Borrowers who choose an ARM should have a full understanding of what risk is involved and that depending on market conditions, their principal & interest payment may increase in the future. Although the rate can change, they generally remained fixed for a minimum period of time anywhere from 3-7 years depending on the program chosen. When deciding on an ARM, there are several disclosures that a borrower must sign indicating they fully understand that their payment may increase.
Depending on individual circumstances, an ARM can be a favorable choice for a borrower because of the lower interest rate. If a borrower is in a “starter home” and plans on moving to another home in a few years, they can benefit from an adjustable mortgage by paying less interest and an opportunity to build equity faster.
A current homeowner looking for payment relief may find a benefit in an ARM as well. With a current interest rate of 6%, there would be a payment reduction with a refinance into a new 30 year at a rate of 4.25%; however the payment reduction would be even greater with an adjustable mortgage and a rate of 2.75%.
Speak to a licensed mortgage originator – they can help you decide which type of program best fits your needs. All programs are subject to qualification and not all borrowers will qualify.
Have more questions?
Call me!
Guaranteed Home Mortgage is a Direct Lender licensed by the PA Dept. of Banking
Dan Ranck
Guaranteed Home Mortgage Company, Inc.
5513 Main Street
East Petersburg, PA 17520
Telephone 717-271-2400
Toll-Free 1-888-566-1795
Fax 1-888-275-8495
NMLS # 140989
