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Mortgage Rates ~ Adjust it or Fix it?

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Most people do not know that there are hundreds of loan options and mortgage programs available to most homebuyers. The big question becomes, what program do you choose?

The most common type of loan is a fixed rate mortgage. Typically 30, 20 or 15 years. A fixed rate loan will give you security knowing that your rate will not adjust and the only reason for an adjustment in payments would be you have an escrow account and your taxes increase. With a fixed rate loan it provides you with a sense of security knowing what your payment will be each and every month.

There are times when a fixed rate is not always the best option. Another option would be a ARM (adjustable rate mortgage) ARM's are typically for 3, 5 or 7 years. With an ARM your rate will only be stable for a period of time and then adjust after that time. For example a 5 year arm will give you the security for 5 years knowing that your rate and payment will not change (except for an increase in your escrow account) until the 61st month. If you know the home you are purchasing is a home you will only be in a few years an ARM may be an option for you.

About 1.5 years ago an ARM provided a much lower rate than if you were to choose a fixed rate. It allowed you to borrow more due to the significant difference in the rate. However, in todays market an ARM is not much lower than a fixed rate loan. I would recommend an ARM if you know that you will be in the home for only a few years. If that is only your goal but not a definite plan a fixed rate loan might make more sense.

If you have had credit issues that disqualify you for a FHA or conventional loan and a sub prime loan is your only option, an ARM would be the loan type recommended. With a sub prime loan you will receive a much lower rate by choosing an ARM. In this situation the ARM should be considered an option to allow you to repair your credit. Most sub prime ARM options are 3 years. This will give you 36 months to establish new positive credit. With a sub prime loan you will want to make sure that you have created a credit profile that will allow you to refinance to an FHA or conventional loan. The adjustments on your rate with a sub prime loans after the 3 years will typically be substantial.

A first time home buyer client of mine bought a home in 2005 with a 5 year ARM. It allowed her to have a lower payment at the time of purchase. After talking with her and going through the options available, she decided on the ARM because her future plans were to move into a larger home in a couple of years and she would also be earning a better income after completing her schooling. With the difference in payments between a fixed rate and an ARM at the time, this made sense for her.

Between a fixed rate and and ARM, there is no right or wrong. Working with a Mortgage Consultant that will provide you with options so that you can make the best choice for your loan is the best option.

Kim Murphy

Personal Mortgage Consultant for Life

Providing home loans for Illinois for over 10 years.

pictures courtesy of flickr

Posted by Kim Murphy | Mortgage Loans in DuPage, Kane, Cook, Lake, Will Counties Illinois on 07/26/2007 08:29 PM

Comments (34)

fixed rate, arm

This post has been included in Illinois Information
Post is included in group: Carnival of Content - Loan Officers/Mortgage Lenders

34 Comments on Mortgage Rates ~ Adjust it or Fix it?

JUL

2007

Nice post about a hot topic right now. Have a great upcoming weekend.

Dave, Thank you for stopping by! I hope you also have a great weekend!

Kim - I loved the fact that you pointed out that ARM's were cheaper awhile back. That is a fact. Yet, you also said "If you have had credit issues that disqualify you for a FHA or conventional loan and a sub prime loan is your only option, an ARM would be the loan type recommended." Mixed feelings on that, it depends on one's equity position to a large degree. I'm not totally convinced in what I've seen, that ARMS on the sub-prime level are that much cheaper at this point to get into if your financing >90% of your home's worth.

Jason... In the sub prime market I have seen rates 1 to 2 points less on a ARM vs a fixed rate regardless of the LTV. This statement was totally based on using the sub prime loan. I appreciate your input! There really are just so many other options as well, with Alt A, I/O, Option ARM...this post would go on forever! Thank you for checking in!

Hey Kim, I have seen that as well months and a year plus back, just not as much lately. My concern with the LTV when the loan is made is where they would be when the rate adjusts from an equity standpoint.

On another note, Wells Fargo just cut their sub-prime involvement...not that they were an aggressive player to begin with, they just were stable and made sense.

Have a good weekend Kim.

Jason... I agree with the concern on the LTV and rate adjustments... I guess that is what makes our job so important when counseling a client so that they don't end up as part of the sub prime melt down! Alot of investors are cutting back many sub prime programs and underwriting has really tightened their belts!

Thanks Jason, you have a great weekend as well!

Kim, Wonderful post for any type of homebuyer. Unfortunately I have not seen many 30 year fixed loans latley!!

Mana... Thank you! I am actually surprised that you have not seen many 30 year fixed loans. I find them to be the hot ticket lately with ARM rates not being much lower. Payment differences are not enough to make people want to do them.

Kim.. good post.... it was easy to understand and flowed well. And I agree with Jason, that you added that arms were lower a few years ago, but that they aren't as low now. And then you added that it's all about longevity, how long that you plan to stay in the house. What I call goals. :o)

And I also agree with your comment in regards to Mana's comment. That is an odd one, considering where the rates are.... but again, so many factors involved.... assets, credit scores, goals.... again, very good post.

jeff belonger

Jeff... Agreed, so many factors in every loan, that its so hard to just give the "quote". Thank you for the compliments, your input is always appreciated!

Hi Kim,

I like the idea with the ARM for the sub-prime borrower. Of course my expertise is not in loans, but with all the happenings with the sub-prime lending and the new restrictions that are being applied, I can not keep up with it anymore and it is getting confusing. Not like the old days.

I am still trying to refer someone to you. I do not have any buyers in Illinois, just Indiana.

JUL

2007

Kim, you have to consider that in California not a lot of first time homebuyers have that much to put down as a down payment. The average price of homes in my town is around $550K and there are no lenders that I know of that would do a 100%, 30 year fixed. However, the move-up-buyers who have just sold a home go for nothing but the 30 year fixed.

Mana... just curious... what lenders on arms doing 100% then? Still many factors left out... credit scores are one of them. What about 80/20's? that is still 100% financing. Just curious and just throwing this out there. Maybe we all can learn from some of these comments. And just from my experience, if the arm has a cerain LTV, the fixed rate usually would also. It goes with the risk factor. thanks....

jeff belonger

Loved the post Kim!! Good scenario!! This deserves a GOLD STAR...I know I voted for one and rated this a "5!"

Great post!! So many things to consider and make sure the client understands! That's why we leave that up to you!!

Hey KIM,

here in colorado on many areas it should not be a good idea to get an arm or pay option arm as normal buyer, market it is not good for sellers, we are in buyer's market, so homes do not appraise well and many builders are killing the market. so yes, depends as you wrote, depends if you are an investor or if the market it is good, etc, so you can stick with an ARM or a Fixed rate.

Great blog :) great information for consumers.

Ray Saenz

Nice article. Easy to understand. Good luck.

Kim, Nice piece... good information. I like how you broke it down. Really like your last piece about speaking to a professional

Kim- Great job. I wouldn't have expected any less. Two Thumbs up.

Susie... Thank you my FRIEND! Your support is always appreciated!

Rick and Lynn... Your continued support is Awesome! Thank you!

Ray... You know me, I always try to make it easy for the consumer to understand.

Lenn... Thanks! I'm up against good writers/LO's

Matthew... Its important to find a "Pro" Thanks!

Shaun... Thanks for checking in!

Chuck... Sub prime is sticky too, but sometimes its their only option. BUT...as long as they get ALL the information!

Kim,

I am sorry it took me so long long to get to your post, I had a pet issue at home, either way you break down the basics really nicely, what I see you doing is, giving consumers two viable options, with one honest professional opinion..

Very Good,

Tom Weiss

Thanks Tom! Honesty is the best method as we all know!

Kim, I always seem to gain new insight by reading posts from other Loan Officers from other areas of the country. For example you stated that 3/1 ARMs were the most popular in the Subprime market where you are, but around here it was the 2/1 Subprime ARMS that I see the most of. It just goes to shows that one size does not only not fit all when it comes to Loan Products but that it also applies to different parts of the country.

I enjoyed reading what you had to say.

George... It use to be 2/28, alot of the sub prime investors have changed to 3 year. I do think that there are different programs for different parts of the country.

Jeff, I just closed on a house where my buyers did an 80/20. They have fantastic credit, but not quit enough to cover the down payment (their lender told them putting 0-10% was not going to change the rate by that much). So, they got to pay an adjustable mortgage for some years and then a fixed one (sorry I don't remember the number of years).

Kim I apologize, I did not mean to hijack your post.

JUL

2007

Mana... I love the interaction! Its all good! I am surprised they were told that putting 0-10% down wouldnt change their rate much! Financing 100% versus 10% can make a pretty big difference in rates! ARM or fixed. For the simple reason that 100% financing is much more of a risk.

Kim...Good post. I may disagree with some points, like only being about longevity, but you did a very good job explaining the differences and how one needs to seek a qualified mortgage professional.

One question I have for the readers...After reading the posts submitted for the contest, does anyone feel the need to "rate shop", or are they getting the point they need to focus on finding the right mortgage professional that brings the "best value"?

Very valid & important point Robert!

Kim - well thought out post with great information for your Illinois Home Buyers.

Robert... Very true it is not only about longevity. I guess that may be a missed point in the post. Thanks for the compliment.

Jack... Thank you, always nice to see you!

JUL

2007

Kim, this is a very nice, concise post, and I love that you thought to link to your main website right in the post. A local consumer reading this may find that very handy.

JUL

2007

Kim, Great post. Lately I've done a lot of 30 yr fixed with the 10 yr interest only option. This allows the client the interest only payment and the fixed rate for 30 years. Of course after 10 years this converts to a 20 yr loan but the rate remains the same. In 10 years it may be a great rate or it may be time to refi.

Sarah... Thank you! I always try to write for the consumer, easy to understand simple information.

Bernie... I have done some of the 30 yr I/O also. I do like them, if they understand them!

Thanks you both for stopping in!

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