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