ARM's Vs. Fixed Rate Loans;
How They Affect Your Rate

So many choices, where to begin.  So let's take a moment to explore the different rate options and how they can benefit your mortgage.

The important thing to remember here is that the more risk the lender (bank) assumes, the higher the rate will be.   For example, a rate on a 30 year fixed loan will be higher than on a 1 year ARM.  

ARM's  (Adjustable Rate Mortgage)

Typically you see ARM mortgages based on 1,2,3,5, or 7 years fixed based on a 30 year amortization.  That means the rate would be fixed for 3 years on a 3 year ARM and then adjustable for the remaining 27 years.  (I'm not going to get into how the rate adjusts after the fixed period, it's a somewhat complicated item to explain and will save it for another report)

Advantages of a Adjustable Rate Mortgage

• Lower rate to match expected time in home

• Provides considerable monthly savings

Disadvantages of a Adjustable Rate Mortgage

• Fixed for a short period of time

• After the fixed period, the rate could go up depending on the current bond market.  It can also go down.

NOTE:  Do not confuse ARM's with a Balloon Mortgage.  Most local banks offer Balloon Mortgages which the loan period is for say 5 years based on a 30 year mortgage.  This means that the payment is based on 30 years but the loan is due in full at the end of your 5 years.  At that point, you must obtain a new loan where as an ARM is not due and will continue for 30 years adjusting from year to year depending on the bond market.

Fixed Rate Mortgages

Typically you see fixed rate mortgages based on 10,15,20,25, and 30 years along with even 40 and 50 year amortizations.   Not all lenders offer the same term you may be looking for, so it's the job of the mortgage broker to find a lender that will meet your criteria.  Also, you will typically see the rate to be a little bit less on a shorter term.  For Example, a 15 year rate will be less than a 30  year rate.

Advantages of a fixed rate mortgage are:

• Fixed rate for life of loan, so if rates are good, you benefit.

• Shorter term fixed rates force you to make more aggressive payments thus saving you significant sums of money from a 30 year fixed rate.  

Disadvantages of fixed rate mortgages.

• The idea of a fixed rate is appealing, however if you only plan to be in the house for 5 years, than an ARM may be more appropriate as you will have savings from a lower rate.