Tuesday, November 15, 2011

Fixed rate vs ARM. Is one better than the other?

  Fixed rate mortgage vs ARM.  Which one is better?  You can make legitimate and salient arguments for both but at the end of the day, there is no right answer.  Each one has its place and its up to the borrower to decide which one is best for them.  The job of the loan officer is to explain the pros and cons of both.

  Let's start with the fixed rate loan.  It is certainl;y hard in this environment of low rates to argue against taking a fixed rate mortgage.  You never have to worry about your rate or your monthly payment increasing.  But, that comfort does come at a price.  Fixed rate loans have a higher rate than ARMs.

  ARM products have a 30 year amortization just as fixed rate loans do.  The difference is that the rate is not fixed for the life of the loan.  There are 3, 5, 7 and 10 years ARMs and the rate is fixed for that respective amount of time.  Think of it this way-its risk vs reward.  The risk is that if you still have the loan after the fixed period is up, your rate may go up.  The reward is that you have a lower interest rate.  Strangely enough, because of current market conditions, those that have ARM products that are adjusting now are actually adjusting lower than the start rate.  Don't expect that years in the future!  Its also important to note that statistics show the average legnth of a loan to be 7 years.

  Understanding the principles above leads us to the trends that guide people in deciding which product to take.  Those that are buying a home in which they will stay long term tend to look at fixed rate loans.  Those that see themselves in the home for 5 or 7 or 10 years, tend to look at the ARM products because the chances of entering the adjustable phase are smaller.

  Know the pros and cons of each.  Run the numbers and see exactly what the difference is in the payment. Its not rocket science.  With that information, make the decision that is best for you or your family.


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