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Pamela J. Gordon, President

Fixed or Adjustable Rate Loan

Which Home Loan is Right for You?

A Fixed-rate mortgage  has the same interest rate for the life of the loan, whether that is 40, 30, 20, 15 or 10 years. Because the interest rate never changes, neither does the principal and interest payment.  This allows you to know exactly what that portion of your payment will be every month.  Of course, if you have an escrow account for your property taxes and homeowners insurance that may go up or down as your taxable value goes up or down. Some people prefer to be able to plan in advance what their payments will be and like the assurance that their principal and interest payment cannot go up.  Currently these are currently the most popular and easiest to obtain mortgage loans.  When interest rates are low, lots of borrowers want to lock in a low rate long term mortgage. During the early amortization period of a fixed-rate mortgage, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. That gradually reverses itself as the loan ages. 

Adjustable Rate Mortgages - ARMs, as we usually call them  -- come in even more varieties.   Most ARM programs have a fixed rate period at the beginning of the loan followed by the remaining years that the rate can change.  The most common programs have a fixed rate of 3, 5 or 10 years.  Normally the shorter the fixed rate period, the lower the starting interest rate.  Most of these loans are based on a 30 year term and a 30 year amortization.  Therefore the loan will have an adjustable period of 27, 25 or 20 years. It is very important to know all of the details of the ARM program that you are considering. You need to know after the 1st change period, how often can the rate change.  Most of the ARM programs readily available today change every year after the initial change.  However there are some programs that can change every 6 months. You also need to know what the margin is on the loan.  The margin is the percentage that is added to the financial index to give you the new interest rate.  Most of the loans available today range from 2.0% to 2.75%. The financial index is what the new interest rate will be based on.  This might be the Libor rate, the Treasury rate, COFI rate or others.  It is important that you find out which one is attached to the loan you are considering and find out the history of the up and down movement of that index. Lastly you have to know the caps or limits on the amount of up and down movement of the interest rate.  Many of the ARM'S have a cap of 5% or 6% for the first rate change and then 2% a year after that.  That protects you from your interest rate going too high but also can prevent it from going as low as it could.  There is also a life of loan cap on most loans.  Again, that is usually 6%.  An example of how all of this works is this:   If you take out a 5/1 ARM loan, it will have a 5 year fixed rate period and then will change every year on the anniversary date, for 25 years.  If the loan starts at 4.5% it will have that rate and the same payment for the first 5 years.  At the end of 5 years, if the index is at 2.78% and your margin is 2.25%, your new interest rate will probably be 5.125%, if your loan is adjusted to the closest .125% rate.  However, it will now be based on a 25 year amortization, as that is the remaining length of the loan.  The payment will be based on the current balance of the loan, not the original amount that you borrowed.  At the end of the 6th year, if the financial index is down to 1.8%, then the new interest rate will be 4.125%.  The 2% annual cap is based on the current interest rate of the loan and not the original start rate. Adjustable Rate Loans are great for people who are confident that they will be moving from their home by the time the rate is going to change.  It is also a great loan for borrowers who are planning to pay off their mortgage in the time period of the fixed rate portion of the loan.  The attraction is that often the start rate is lower than a fixed rate loan.  In a period of high interest rates, this might be a very good choice to use until fixed rates drop and you can refinance to a low rate long term fixed rate.

There are a lot of considerations when deciding on the best loan program for your individual financial goals.  Let us present all of the facts to you and help you make the right decision for you.  We have many other factors to consider when making suggestions to you. 
So call us and let's discuss your needs!                             

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