Security and affordability %u2013 Choice of fixed or an adjustable rate mortgage is substantially dependent on these two factors. Where fixed rate mortgage (FRM) offers certainty of constant monthly payments and easiness to calculate monthly cash flows, adjustable mortgage rates (ARM), on the other hand, are inexpensive but modified periodically, based on interest rates. FRM is for individuals who... [more]
Security and affordability %u2013 Choice of fixed or an adjustable rate mortgage is substantially dependent on these two factors. Where fixed rate mortgage (FRM) offers certainty of constant monthly payments and easiness to calculate monthly cash flows, adjustable mortgage rates (ARM), on the other hand, are inexpensive but modified periodically, based on interest rates.
FRM is for individuals who are a bit reluctant to take risk. It is surely expensive but at least people are aware of exact future outgoings. A fixed interest rate that remains the same throughout the loan term is one of the major features of FRM, and the most attractive too. A list of confirmed future cash flows and stable predictability entices a lot of people to choose it. Instead of pondering over interest rate ups and downs, you get your mortgage and just forget about it. Is there anything easier?
Adjustable mortgage rates (ARM), on the other hand, seduce borrowers with its initial low rate and monthly payments. They are fixed for a specific time, after which both rate and payments are adjusted. ARM is usually inexpensive as compared to the fixed rate mortgage, because ARM is based on the short term bond market while FRM is pegged to long term bonds. The short term market normally features lower rates than the long term market.
In spite of this, FRMs fixed rate generally does not indicate that it is not as good as ARM. If interest rates in the bond market are higher, then surely the rate and payments would increase (ARM). And who would prefer a higher-than-anticipated payment? But still, statistics of people with an adjusted rate mortgage ending up in loss are really low. My question is: which payment structure would you select? What factors would you consider keeping in mind the current standing of the US economy?
Regards
Original Blog Link: http://blog.mfgmortgagerates.com/?p=162[less]
Response by ab_11218
about 16 years ago
Posts: 2017
Member since: May 2009
my first mortgage was a 30 yrs fixed, a mistake. i knew that i would not live in the place for more than 5-10 yrs.
my second mortgage was a 7/1 ARM interest only. i knew then that i would live in the place for 7 yrs or less. if more, then not too much more. i was gone in 4.
my next mortgage will be a 7/1 ARM. i know that i will live there for 5-8 years and then move. even after the readjustment for 1 year, i know i would have saved vs a 30 yr mortgage.
people need to look at the approximate time they expect to live in a place and make their decision on the mortgage fixed period term based on that. currently, the difference between a 30 yr fixed and a 7/1 ARM is 1%. that's a savings of $301 per month for 7 years based on a $500K mortgage with the savings of $25K+ over the term. it just makes sense.
my first mortgage was a 30 yrs fixed, a mistake. i knew that i would not live in the place for more than 5-10 yrs.
my second mortgage was a 7/1 ARM interest only. i knew then that i would live in the place for 7 yrs or less. if more, then not too much more. i was gone in 4.
my next mortgage will be a 7/1 ARM. i know that i will live there for 5-8 years and then move. even after the readjustment for 1 year, i know i would have saved vs a 30 yr mortgage.
people need to look at the approximate time they expect to live in a place and make their decision on the mortgage fixed period term based on that. currently, the difference between a 30 yr fixed and a 7/1 ARM is 1%. that's a savings of $301 per month for 7 years based on a $500K mortgage with the savings of $25K+ over the term. it just makes sense.