Important Questions for Fixed vs ARM Loans?

So after reading the pros and cons of a fixed or adjustable rate mortgage, I’m sure you know which one is the best for you? Before you finalize your decision make sure to ask yourself these important questions:

1. How long do you plan on staying in the home? If you plan to stay in the house for only a few years, it would make sense to take the lower rate ARM, especially if you can get a reasonably priced 3/1 or 5/1. Your payment and rate will be only and you can build up your savings for a bigger home down the road. Plus, you’ll never be exposed to huge rate adjustments because you’ll be moving before the adjustable rate period begins.
2. How frequently does the ARM adjust and when is the adjustment made? After the initial, fixed period, most ARMs adjust every year on the anniversary of the mortgage. The new rate is actually set about 45 days before the anniversary, based on the specified index. But some adjust as frequently as every month. If that’s too much volatility for you, go with a fixed-rate mortgage.
   
3. What’s the interest rate environment like? When rates are relatively high, ARMs make sense because their lower initial rates allow borrowers to still reap the benefits of homeownership. When rates are falling, borrowers have a decent chance of getting lower payments even if they don’t refinance. When rates are relatively low, however, fixed-rate mortgages make more sense. After all, 5% is a great rate to borrow money for 30 years.
4. Could you still afford your monthly payment if interest rate rise significantly? On a $150,000 one-year ARM with 2/6 caps, your 3.75% ARM could end up at 9.75%, with the monthly payment shooting up as well. How adjustable rates can rise:
   

   Year of ARM	Rate	Monthly payment
   First year	3.75%	$695
   Second year	5.75%	$875
   Third year	7.75%	$1,075
   Fourth year (6% lifetime cap)	9.75%	$1,289
   $594 more than the first year

   Now, let’s compare this worst-case ARM scenario with a fixed-rate mortgage:

   Interest rate during 4 years	Total payments during 4 years
   ARM: 3.75% to 9.75%	$47,201
   Fixed Rate: 5%	$38,651
   $8,550 more than fixed rate

Right now the fixed rate are really low and you can see in the above scenario that mortgage will be less with a fixed rate. It is always a good idea to go with a fixed rate when interest rates are low, even if you plan to stay in the house for only a few years.

To find out what the mortgage principal and interest would be on a particular loan you may be considering, use an online mortgage calculator or contact me for some friendly advice.