12 September 2007
Foreclosure doesn't just happen to people who don't make their mortgage payments. Your homeowner's association (HOA) can take your house or condo if you're not careful. In one case, a disabled California man lost his home in a foreclosure sale because he was $123 behind on his homeowner's dues. The house was worth $280,000. Unfair? Abusive? You bet!Read More »
Fixed vs. Adjustable Mortgage Rates
By Richard BarringtonNFNS Columnist
One of the most
fundamental questions a mortgage shopper will face is whether to opt for fixed
or adjustable mortgage rates. The right answer depends a great deal on your
individual situation, including such factors as how long you intend to own the
house and how closely you budget your monthly expenses.
ARMs Take the Heat
Adjustable-rate mortgages have taken some of the heat for
the recent mortgage crisis, as some borrowers experienced "sticker
shock" when monthly payments adjusted upward. Even so, there is still a
place for adjustable-rate mortgages, as long as they are properly understood. In
most cases though, a fixed-rate mortgage is likely to make the most sense --
especially under current mortgage rate conditions.
General Guidelines
With a fixed-rate mortgage, your mortgage rate will be
locked in for the life of the loan. This means that your monthly payments will
stay the same throughout. In contrast, adjustable-rate mortgages feature a
variable mortgage rate. Typically, this variation involves two stages: first,
there is often a special low "teaser" rate for an initial period
lasting from anywhere between 3 months and ten years; second, the mortgage rate
will adjust periodically with the financial markets as interest rates go up and
down.
Since mortgage rates can change a great deal, an
adjustable-rate mortgage could cause significant increases or decreases in
monthly payments. That's not necessarily a bad thing -- if interest rates are
high when the mortgage is initiated, the opportunity to see them fall without
having to pay refinancing costs may be beneficial.
In general though, an adjustable-rate mortgage would be preferable only if one or both of the following conditions were met:
- You don't plan to own the house for more than a few years. In this case, you can take maximum advantage of a low teaser rate on the front end of the mortgage, without exposing yourself to as many years of interest rate variation on the back end.
- You
have a substantial amount of cushion in your monthly budget. Consequently,
an increase in monthly payment will not bring you to the brink of default.
Today's Conditions
Today's mortgage rate conditions add even more weight in
favor of fixed rate mortgages. Mortgage rates have recently fallen below 6.0%;
historically, mortgage rates have averaged below 6.0% in only three of the past
thirty-six years. This suggests that current mortgage rates are toward the
lower end of their range. In other words, based on historical levels, rates
have more probability of moving upward from here than downward.
The Refinancing
Option
Even with a fixed-rate mortgage, it is possible to take
advantage of a sharp fall in mortgage rates by refinancing. However, mortgages
these days often have refinancing or pre-payment penalties, so check out these
terms before you commit.
Ultimately, fixed and adjustable-rate mortgages are just
financial tools, and tools themselves are neither good nor bad. Understanding
the best way to use these tools will allow you to make them work for you.
Source:
Freddie
Mac
About the Author:
Richard Barrington is
a freelance writer and novelist who previously spent over twenty years as an
investment industry executive.
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.