Fixed? ARM? 2 Types of Mortgages and the Differences Between Them

Analytics

Congratulations on taking the first steps to buying your own home.

Laptop

From the actual house hunting to furniture shopping and decorating, this is a fun and rewarding time that you will remember for the rest of your life. With that said, trying to decide between the type of mortgages offered and the lowest mortgage rates can not only be stressful but can also become quite confusing.

Fixed? ARM? What are they, and what’s the difference between them? These are all great questions, but before we dive into the types of rates and loans out there, you might want to understand how mortgage rates are determined and how lenders like us come up with the offered mortgage programs.

Lenders can offer several different programs, so let’s get down to the nitty gritty and define a few of the main types of mortgage loans we offer.

Fixed Rates

Home Front

A fixed-rate mortgage is pretty self-explanatory. It’s a rate that is set and will not change on its own. This is a major advantage when it comes to the budgeters out there. Buyers can manage their money better knowing that their mortgage will remain the same month after month. Another perk with the fixed rate mortgage is the easy-to-understand terms. This is especially great for first-time home buyers, who would have no clue what a 7/1 ARM with a 3/7 cap means if it hit them right in the face.

Although a fixed-rate mortgage can give buyers more security knowing that their rates won’t change, sometimes those changes can benefit home buyers. Many economic changes can lower current interest rates, thus reducing the total loan repayment plan. Unfortunately, with a fixed-rate mortgage, taking advantage of those changes will come several costly steps.

To take advantage of any rate changes, you would need to start the refinance process. That means hours spent working with one of our loan officers, digging up bank records and tax forms, and a few thousand dollars in refinancing fees and closing costs.

Another thing to take into consideration before jumping on the fixed-rate wagon is that they are almost identical between lenders. Most lenders try to keep ARM’s on their own books and sell their fix-rate mortgages to a secondary market. This practice allows the loan department more flexibility to tailor each ARM for the buyer, while most fixed-rate options cannot.

ARM or Adjustable-Rate Mortgage

Analytics

An adjustable-rate mortgage (also called an ARM), variable-rate, or floating rate mortgage is a type of mortgage where the interest rate varies throughout the loan life. Typically, the initial interest rate starts out at a fixed rate for a specific time period but will reset periodically. In many cases, your rate will reset yearly, or sometimes monthly, depending on the economic standings. Investopedia.com explains how resets are based off a benchmark or index, in addition to a spread, called an ARM margin.

There are several advantages that borrowers gain by choosing the ARM. Many times monthly payments are lower, allowing qualified borrowers to buy a larger home, which they likely could not afford otherwise. The ARM also allows borrowers to snag falling rates without having to refinance the loan. ARM borrowers don’t have to pay a closing cost or large fee – they can just sit back, relax and watch their rate and monthly payment drop. That sounds pretty good, right?

Many borrowers enjoy this option because the extra money they are saving on the monthly payments can go into savings or investments, or other areas such as school loans, making double payments on car loans, or starting an emergency fund.

An ARM is also an excellent option for the entrepreneur and market investor out there. If you are buying a house to flip with the intention to sell within a short time period, taking advantage of an ARM might be a good option for you.

Just like everything, you have to take the good with the bad. Some of the disadvantages of an ARM can not only be stressful but can become quite costly. Your rates and payments can rise substantially over your loan period. Let’s say you sign with a 3 percent ARM. It is not unlikely for that to double to 6 or even 7 percent in just a 3-4 year period.

That first adjustment can be a rough one because some of your annual caps may not apply to your initial change. If you have a lifetime cap of 6 percent, you could theoretically see your rate go up from 3 percent to 9 percent just a year after closing your rates. Most people don’t have the means to pay their mortgage if it is more than double what they initially budgeted.

ARMs are at times difficult to understand. It’s important that you choose a lender that has an excellent and trustworthy reputation, who will be upfront and honest with the type of caps, margins, and adjustments you’ll have. Just like buying a car, the last thing you need is to get stuck with a shady mortgage company who doesn’t have your best interest at heart. Along with vetting the lender you want, always check the mortgage rates forecast before you sign on the dotted line for an ARM.

Let us help

Meeting

Buying your home is supposed to be an enjoyable process. When you call us to get started, you won’t get someone that will take your information and pass you off to the next person in line. Trust me – we hate that too. We will take the time to get to know you and your needs. At Twin City Lending, we take pride in building lasting relationships and specialize in VA Loans, low-interest home purchase loans and refinance loans. Our goal is to get you into your dream house, without it costing you your arm and leg in interest and fees. Why? Because nobody’s got time for that.

What are you waiting for? Let’s get this party started. Before you know it, you will be having your very own housewarming party in your new home.

Do’s and Don’t of the Mortgage Process: 5 Things Lenders Want You to Know

Paper work

Holding the keys to your first house is a feeling that most people never forget.

Home Key

Unlocking the front door and walking through it for the first time after closing can seem like a dream come true. You start thinking about all the memories that you will create in your new space. That’s right, your space.

But how do you get from just dreaming of your house to stepping through your front door? For most people, the next step is getting a mortgage. However, if this is your first home, the mortgage process can seem daunting. Even if you have been through it before, it can be overwhelming.

Continue reading below about five things lenders want you to know about the mortgage process. You might even realize that getting a mortgage and owning a house is not that far away for you.

1. Do: Get Pre-Qualified, Don’t: Shop Out of Your Price Range

Business Meeting

Pre-qualification is an important first step in the home buying process. It is a rough estimate of what a bank would loan you based on a general picture of your income, your debt-to-income, and your assets. Lenders don’t check your credit score for this step, and you can generally get pre-qualified over the phone or online.

A pre-qualification isn’t a guarantee from the lenders, but it still is important for a few reasons. First- you get a better sense of what your next steps are to reach your financial goals, and second – when you start shopping for houses, you are looking in your price range.

2. Do: Improve Your Credit Score, Don’t: Assume Your Credit is Good Enough

Online Payment

You have been pre-qualified so you have an idea of what you can afford, but a better credit score will help you get a lower interest rate on your loan. It might not seem like a lot, but a 4% vs. a 4.5% interest rate will be a difference of thousands of dollars at the end end of your loan. (Check out what different percentage rates would do to your monthly payments and your overall loan with this savings calculator.)

Improving your credit score will take some time as there are no quick fixes, but a better interest rate is worth the wait.

You might be thinking, “OK, great. I’ll improve my credit score, but what should my target number be?” The specific minimum credit score can vary from lender to lender. However, since the recession, lenders are looking for a higher credit score than they did in the past. So, so even if your credit score is already above the average minimum, work to improve your score.

Remember, a better credit score can get you a better interest rate. Be patient, it takes a little while for your credit report to reflect your hard work, but in the meantime continue reading to find out more ways to help yourself secure your home loan.

3. Do: Lower Your Debt to Income, Don’t: Take On More Than You Should

Work Desk

Lenders will take a very close look at all your finances including your debt-to-income ratio (DTI). So what exactly is your DTI ratio and why is it essential to have a low number? DTI is how much money you have left over after you make all your monthly payments.

Lenders are looking at how much money you earn each month, and how much of that money goes toward the debt you already have. Ideally, you should have a DTI less than 43%. Find out what your DTI is so you can work to improve it to get the DTI number you need.

The higher your debt-to-income, the less you will be able to comfortably take on. Now is the perfect time to get serious about your debt. There are a lot of tips on how to pay off debt that you might not have thought of already.

While it is hard to make changes to your lifestyle during this process, it will feel so nice not to have the financial burden of all this debt. Additionally, getting your debt-to-income ratio lower is not something you will regret when you are drinking coffee on the first morning in your new kitchen.

4. Do: Get Pre-Approved, Don’t: Wait Until After You Find a House to Get Pre-Approved

work desk

Pre-approvals make the whole process feel real. Lenders are looking through all your documents, checking your credit, writing up your loan, and sending it off to underwriters to get approved. The whole process it nerve-wracking and exciting.

Pre-approvals aren’t a guarantee, but they are pretty close, and they do give you a good understanding of what your interest rate might be.

Some people wait to get pre-approved until after they have made an offer on a house, but it is a good idea to get pre-approved before you make the offer. In fact, some sellers won’t entertain offers without a valid pre-approval letter.

Now, it can be a rather lengthy process as it is your financial history under the microscope, but if you have all the necessary

documents organized and ready to go, it will make the process a little smoother.

5. Do: Ask Questions, Don’t: Work with Lenders You Aren’t Comfortable With

Buy Home

Lenders are knowledgeable and have experience with the mortgage process. They want to help you get a loan and get into the house of your dreams. This loan might be your first home loan or your fifth. Regardless, you will have a lot of questions.

It is vital to ask questions when you are unsure or unclear about something. Your lenders understand this is one of the biggest (if not the biggest) financial decisions of your life. They want to help you every step of the way and make sure you feel comfortable and informed during the process.

Buying a home is one of the most exciting purchases in your life. Twin City Lending is here for you every step of the way. Contact us todayfor your home loan needs.