In 2013, the Types of Mortgages Acquired Shows the Trend...But Should You Follow Suit?
Fixed or Adjustable Rate - IT DEPENDS! 94% of purchasers last year opted for a fixed-rate mortgage at some of the lowest rates in home buying history. Yet, some of them will pay more in interest than necessary, based on the time theyll own the home. For how long do you plan to own your home? Let the answer play a large role in your decision making between mortgage options. If a person only plans to be in the home a few years, the adjustable-rate can offer significant savings. Not only is the interest rate on the adjustable-rate lower than the fixed in the initial period, amortization on a lower interest rate amortizes faster than a higher interest rate. In the example shown below, a $200,000 mortgage for 30 years is compared using a 4.25% fixed-rate to a 3.25% 5/1 FHA adjustable rate. The first five years of the ARM generates a $113.47 a month savings which accumulates to $6,808.20. In addition, due to faster amortization on lower interest rate loans, the unpaid balance at the end of five years will be $3,001 lower on the ARM for a total savings of $9,801. Assuming the adjustable-rate mortgage was to escalate the maximum allowed at each period, the breakeven would occur in 8 years and 6 months. If a person were to sell the home prior to this point, the ARM would provide a lower cost of housing for the homeowner. When will your breakeven occur? Define your intents to make the best decision. You'll find a helpful calculator here, to compare financial outcomes dependent upon several variables. For some people, the uncertainty of how the interest rate may change is not acceptable. On the other hand, for the risk tolerant individual who may be more confident in financial matters or who may know when theyll be moving next, the ARM can be a smart choice. To make projections using your individual numbers, see the Adjustable Rate Comparison. One Scenario - Ask, What Are the Variables in Your Decision on Rate?