Which Mortgage is Right for You?

The mortgage world can be very confusing. Every mortgage has variables that determine how much a borrower ends up paying.

Before you begin your purchase, take a look at the different types of loans available today and which one are you most likely to benefit from.

30-year Fixed-Rate Mortgage

This mortgage combines a stable, fixed interest rate with a long loan term that helps create manageable payments for millions of people. During the years leading up to the current mortgage crisis, many homebuyers strayed from this in search of loans with lower interest costs. Today, many borrowers are returning to the 30-year fixed-rate way.

This is best for borrowers who plan to remain in their homes for a long time and/or who want the security of knowing their monthly payment will never change.

30-year Jumbo Mortgage

Jumbo mortgage loans are 30-year fixed-rate loans too big to be bought and repackaged by mortgage giants Freddie Mac and Fannie Mae for resale to investors. Banks that issue jumbo mortgages have to hold onto the debt themselves.

As a result, jumbo borrowers can expect not only a higher interest rate on their loan, but also have more difficulty finding a lender.

Jumbo loans are best for buyers who want large, expensive or midrange homes in areas of where housing is more expensive.

One-year ARM

ARM stands for adjustable-rate mortgage. Unlike fixed-rate mortgages, these loans don’t have a rate guaranteed to remain stable for the duration of the loan. The introductory rates on these loans, which last only for the first year, often are significantly lower than rates on fixed-rate loans. The term for these types of loans are usually 30 years.

After one year, the interest rate and the monthly payment, adjusts periodically based on a mortgage index such as the Libor (London Interbank Offered Rate) or COFI (11th District Cost of Funds Index). In a falling-rate environment, that’s a good thing, as it results in lower payments. However, if rates increase, you’ll have higher payments.

ARM’s are good for buyers who don’t plan to stay in their homes very long and who are looking for lower borrowing costs.

5/1 ARM

The 5/1 ARM is an adjustable-rate mortgage that has a fixed rate for five years. After that, the rate adjusts periodically. Buyers benefit from lower borrowing costs when interest rates fall, but get stuck with higher payments when interests rise.

5/1 ARM are for buyers who intend to sell within five years and are looking to cut down on their mortgage costs.

30-Year Mortgage Rate Drops to 4.5%

The average U.S. rates on fixed mortgages declined this week amid signs the economic recovery is slowing.

The average rate on the 30-year loan fell to 4.50 percent from 4.57 percent last week. The average on the 15-year fixed mortgage came down to 3.54 percent from 3.59 percent last week.

The retreat in the average rate of a 30-year mortgage comes just a couple of weeks after the rate reached a two-year high of 4.58 percent on Aug. 22. The average rate on a 15-year mortgage also hit a two-year high — 3.60 percent — that day. But overall, mortgage rates remain low by historical standards. 
The Long-term mortgage rates have risen more than a full percentage point since May, when Federal Reserve Chairman Ben Bernanke first signaled that the central bank could begin reducing its monthly $85 billion in bond purchases this year if the economy looked strong enough.

Many economists had expected the Fed would to decide at its policy meeting last week to scale back the bond purchases. But on Wednesday, the central bank voted to continue the bond-buying program at the current levels.

They also cut the economic growth forecasts for this year and 2014, warning that the upcoming debt ceiling and budget battles between the White House and Congress could pose risks to financial markets and the economy.

Growth and hiring remain modest by the standards of a robust economic recovery. Employers have added an average of 180,000 jobs a month this year, about the same as last year and in 2011. From April through June, the economy grew at a 2.5 percent annual rate, little changed from its 2.8 percent rate in the quarter when the Fed began its bond buying.

Concerns over the possibility that interest rates will continue to rise have spurred some homeowners to close deals quickly. And U.S. sales of previously occupied homes rose 1.7 percent last month to a seasonally adjusted annual rate of 5.48 million, the National Association of Realtors said Thursday. That’s the highest level since February 2007.

So now that investors fell secure that the Feds are going to keep buying the 85 Billion in bonds each month we are seeing the 10 year Bond pricing stabilize and come down,  which in turn has helped lower Mortgage Rates. No one has a Crystal Ball into the future but for now it seems we are headed lower at least for the time being.

 

 

Fixed-Rate Mortgage Or An Adjustable-Rate Mortgage? Which One is Better for You.

Each one has its benefits and the informed home buyer or refinancer will want to understand how both loan types works to enable the home buyer or refinancer to make the best choice.

Fixed Rate Mortgages

A fixed-rate mortgage is exactly what it sounds like. It’s a mortgage for which the interest rate is fixed for the life of the loan.

Fixed rate mortgages are available in multiple terms, where “term” is used to describe the length for which the mortgage contract is in place. With a fixed-rate mortgage, when the term is complete, the loan is paid-in-full.

As you may suspect, the monthly payment required for fixed-rate loans increase as the loan term reduces. This is because, with a shorter loan term, the homeowner is repaying the mortgage lender over a lesser period of time.

The upside of assuming the larger payment that comes with a shorter fixed rate loan term is that mortgage rates are often lower, and the amount of mortgage interest   paid over the loan’s lifetime is less, too.

The main benefits of a fixed rate mortgage are linked to its predictability. With a fixed-rate mortgage, your mortgage payment is set on Day 1 of your home loan, and never changes until the loan is paid-in-full. Some homeowners like this.

Adjustable-Rate Mortgages

The adjustable-rate mortgage (ARM) is a mortgage for which the interest rate can vary over time.

Mortgage rates are often lower with an adjustable-rate mortgage versus for a comparable fixed rate loan because the homeowner assumes some of the long-term interest rate risk which is fully-assigned to the bank with a fixed-rate loan.

Most ARMs works like this:

• For some preset, fixed number of years, the ARM’s mortgage rate remains unchanged
• After the fixed period ends, the mortgage rate changes based on a preset formula
• Annually, the ARM’s mortgage rate changes again based on the same formula

Adjustable-rate mortgages adjust once per year until the original loan balance is paid in full, usually in 30 years. Note that some ARMs exist which adjust every six months, but they are uncommon. Annual adjustments are most prevalent.

When ARMs adjust, the “adjusted mortgage rate” is a sum of two numbers — a constant figure called a margin and a variable figure called an index. When you add the (margin) to the (index), you get your new rate.

The most common index used for ARMs is the 12-month LIBOR rate, which is currently 0.67%. Margins are typically 2.5%. Today’s homeowners with adjusting mortgage rates, therefore, get new mortgage rates near 3.17%.

The good news is that adjustable-rate mortgages cannot adjust too high, too quickly. This is because ARMs come with “adjustment caps” — limits in how far an adjustable-rate mortgage’s mortgage rate can change during any one adjustment period.

The adjustment caps often vary by the ARMs initial fixed-rate period.

• 3-Year ARM : Rate doesn’t change for the initial 3 years, after which it can change up to ±2% annually, and after which it may never be more than ±6% from the initial mortgage rate.
• 5-Year ARM : Rate doesn’t change for 5 years, after which it can change up to ±5% at the first adjustment, and after which it can change up to ±2% annually, and after which it may never be more than ±5% from the initial mortgage rate.
• 7-Year ARM : Rate doesn’t change for 7 years, after which it can change up to ±5% at the first adjustment, and after which it can change up to ±2% annually, and after which it may never be more than ±5% from the initial mortgage rate.

Adjustment caps protect homeowners from a rapidly-rising index such as LIBOR, limiting how far an ARM can adjust in any given year.

Which Is Better For You: Fixed Or Adjustable Rate Mortgage

There are a lot of reasons to choose a fixed-rate mortgage over an adjustable-rate mortgage; just as the reverse is true. The “best” product will depend on your individual risk tolerance and your short- and long-term financial goals.

Though, in recent years, as fixed rate mortgage rates have dropped, the relative value of an ARM’s low starting mortgage rate has diminished.

Furthermore, certain ARMs including those made in “high-cost areas” may require larger down payments than comparable fixed-rate loans.

Lastly, with ARMs, there are fewer low-closing cost and zero-closing cost mortgage options so talk with us about which product fits you best.