Adjustable Versus Fixed Rate Mortgages

Here is a comparison of adjustable rate versus fixed rate mortgages. First let’s look at the adjustable rate mortgage, (ARM). With the ARM loan you can receive a lower rate initially and here are some of the more popular ARM loan. First of all there is the 1/1 which means you rate is fixed for the first year and then it adjusts or become variable for the next year there after and every year from then on. Next you have the 3/1 which means this rate is fixed for the first three years and then adjusts every year thereafter. The remaining ARMS are the 5/1 which is fixed for the first five years and then adjusts to the current market rate which is usually tied to some index and the 7/1 which is also fixed for the first seven years and then adjusts every year thereafter.

A fixed loan will give you a fixed interest rate for the life of the loan and this provides peace of mind and security and predictability knowing that your payment will always remain the same.

With the ARM loan you are more likely to get a lower interest rate initially than you would with a fixed loan. However we are seeing foreclosures hit a record high because a lot of the ARMS are having the rates adjusted because they are due. Unfortunately the rates are increasing which means the consumers payments are increasing and a lot of times the payment increase can be very substantial. If consumers are not able to make the payments the only other option is foreclosure. This is having a ripple effect across the country. If someone cannot pay their mortgage then foreclosure is inevitable and those previous home owners are now forced to rent. There is not a shortage of rental units which has caused rent payments to increase .

Some have taken on the ARM loans and received the benefit of a lower rate and lower payment with hopes of refinancing in the future when it is time for the rate to adjust. Right now a lot of home values are decreasing which is causing homeowners to owe more than the value of their home thereby eradicating any and all equity. This creates quite a burden for homeowners who want to sell their home.

You should chose the type of mortgage you want based on your own specific goals and objectives.