A difficult question that borrowers often face is whether or not they should lock or float their mortgage rate. This crucial question comes up for both home purchase loans and home refinance loans and it is important to consider all factors in your decision. Take a closer look at what to consider:

Adjustable-Rate Mortgages (ARMs) Adjustable-Rate Mortgages are often appealing due to their low initial cost. ARMs have lower rates and smaller payments in the beginning of the loan term. If mortgage rates fall, borrowers can automatically take advantage of these rates without having to refinance. If rate stay low, an ARM can help borrowers save up money to invest in other properties or ventures. ARMs often times do not require as large as a down payment, so the borrower may be able to purchase a larger home then they initially would have been able to with a fixed-rate mortgage. If you are planning on paying off your mortgage within a short period of time, an ARM can also be beneficial if rates remain low.

Recently ARMs have been becoming more popular especially with those borrowers that are well-off. Mark Zuckerberg, Facebook CEO, financed his home with an ARM with a rate of only 1.05%. Although most borrowers will not be able to get a rate close to that, many can still do well with an ARM right now.

Yet with an adjustable-rate mortgage, there is always a degree of uncertainty and your mortgage rate can never be guaranteed. Due to constant fluctuations in the market, an ARM that starts out at a 4% interest rate can increase to an 8% interest rate over several years if rates rise drastically. Another disadvantage can be that lenders are in control with determining the margin, caps, adjustment indexes and more. As a borrower, make sure you have a level of trust in your lender to know that they will not take advantage of you, as ARMs are difficult to understand.

Fixed-Rate Mortgages

The advantage of a Fixed-Rate Mortgage is that you can lock in a mortgage rate that will remain constant no matter what fluctuations occur in the market. With a stable interest rate, you will know what your monthly mortgage payment will be each month and can budget appropriately. Since fixed-rate loans are simple to understand, they are often the best route to go for first-time home buyers, as they will not be surprised by any change in rates or caps.

However in order to take advantage of lower interest rates, a borrower with a Fixed-rate loan will have to refinance. Refinancing often times requires an initial upfront investment to cover an appraisal, closing costs, etc. and time to get together proof of income, tax forms, etc. to qualify. Fixed-rate mortgage can also be more expensive (especially is you are in a high-rate area) because there is not a lower payment to start.

In order to determine which type of loan is right for you, there are several factors that you should consider when making your decision:

How long are you going to keep the home?

If you are only go to live in the home for several years it would make sense to obtain a 3/1 or 5/1 ARM, because you will be moving before the rate it adjusted. With a lower interest payment, you will be able to take advantage of acquiring some savings that can go towards a larger property.

How often will the ARM adjust and when?

After the preliminary fixed period ARMs typically adjust every year on the original date the mortgage was obtained. Some ARMs even adjust every month. If you see this potential fluctuation in rates as being probable then a fixed-rate is the way to go.

What is the current interest rate?

When interest rates are high, an ARM can make sense because it allows the borrower to begin the loan at a lower interest rate. If rates move lower borrowers can also benefit from the low rates with the ARM without having to refinance. However, if rates are low it makes sense to lock in a fixed-rate to avoid being affected by any increase in rates.

Would you still be able to afford your monthly payment if interest rates rise dramatically?

It is important to look at all of the numbers and truly consider how much higher of a monthly payment can you handle. If you are more comfortable locking in a rate you know you are guaranteed to afford, then a fixed-rate loan would make the most sense.

The experts at Prospect Financial Group, Inc. can answer any of your questions regarding Adjustable and Fixed-Rate Mortgages and help you determine what loan is right for you based on your financial position. If you have any questions or would like to get a free, no obligation, personalized quote call us at (858) 605-0952 or click here to apply online!