Fixed or Adjustable Mortgage
Posted by admin | Filed under Mortgages
*This article was originally written in October of 2006. Not withstanding, the information here is still relevant, with the exception of the ease of loans. The days of 1 percent down loans are over for now, but there are still programs out there, but they are few and far in between.*
Most people will never buy more than one or two houses in their lifetime. This puts the average consumer at a distinct disadvantage because real estate and mortgage professionals may deal with upwards of thirty to forty deals per year.
Gaining knowledge of the mortgage process can help even the deck. If you are trying to buy your first home (or tenth home), gaining more information on the single most expensive “product” you will ever buy will help you when dealing with real estate brokers and bankers.
Mortgage Companies are in it for the Money
Banks and Mortgage companies are businesses that are interested in turning a profit, like every other business. Oftentimes you’ll hear the term “products” being tossed around. Banks have many products they’ve developed over the years depending on current market conditions to market to YOU.
It is your job to not let yourself be hooked by the flavor of the day. Go for the steak not the sizzle.
| By the way, do you know where most of American homeowners keep their savings? Answer: In their home, it’s their nest egg. |
If this is your first time buying a home don’t let the process overwhelm you. You can get through it saving money in the process, so you too, can have a nest egg.
Following these few easy steps will get you started in the right direction.
- Step 1: Choosing the right “product” or loan for YOU
- Step 2: Reviewing your credit
- Step 3: Choosing a lender
- Step 4: Getting approved
Step 1: Choosing the right loan for you
The products that the Banks have run the gamut of teaser 1% loans to your typical plain vanilla 20% down 80% mortgage. ARM’s ( Adjustable Rate Mortgages) are tied to an index, LIBOR being one of the most common, although COFI ( Cost of Funds Index) is also available. Graduated Payment Mortgages are not al popular and Neg-Am ARM’s are once again gaining in popularity.
You must first ask yourself some questions. How long do you plan to stay in the house? How much risk (interest) are you willing to bear? The answer is different for everybody and why finding the best loan that takes into account your unique situation can save you thousands of dollars.
If you plan to be in your house for about 7 years (according to national statistics, the average mortgage is paid off through refinance or sale in 12 years), it makes no sense to take out a 30 year fixed rate mortgage. You are paying for the insurance that your rate remains the same for the next 30 years although you plan on moving on in seven. If you can get a 7 year adjustable (fixed for the first 7 years), you will probably save about 25 to 50 basis points which can translate to $6000 to $10,000 over those seven years.
The question of whether a fixed rate loan or an adjustable rate is better depends on what is happening in the interest rate environment.
At the present time October 2006, interest rates appear to have stabilized. If you feel that interest rates will be coming down than an ARM mortgage is the way to go. If you think rates are going up, then locking in these relative low rates may be the better alternative.
