Risk-reward ratio is an important decision in any financial matter. From choosing the right stock to buy or sell, to determining whether the red number 23 is worth the extra $200, to buying the cheap lunchmeat hoping that it is not recycled Spam, risk-reward is a part of the average consumer’s daily process.
For any mortgage shoppers, risk-reward can show itself in different aspects. One of these aspects is rate shopping. Fixed rate mortgages in are the average buyer’s dream-an interest rate (most often high) for a certain amount of years consistently amortizing (or making the balance decrease over time) until the mortgage is paid off.
For those more daring, and when the market is slowly but surely changing, an Adjustable Rate Mortgage in Georgia (GA), or ARM, is the stock market game for homeowners.
Whereas fixed rate mortgages rely on industry norms, and trends, an ARM GA relies on constantly changing market values, and indexes. This means to a buyer that their interest rate can be significantly lower at times, and significantly higher at times.
The change in interest rates, however, are fixed to the point of a constant index, normally taken from a consortium of loan indices, which are compared to world banks and markets. While there may be few pre-payment penalties, the basic idea of Georgia Adjustable Rate Mortgages are to both the buyer and lenders benefit. For the buyer, the interest rates have a high potential to stay low, making both the actual accrued interest and the monthly payments lower, while also running the risk of inability to repay. The lender has a lessened risk factor of both payment, and loss due to raising federal interest rates. Both parties win, if interest rates are low.
However, very often, the interest rates rise far above the standard interest rates, causing higher interest accrued and higher monthly or quarterly payments, respectively.
In essence, to fully appreciate the great value and the risk, an example would be nice! Janet and Dave just bought a new home. They chose to finance it using an ARM GA, and their rate in the beginning is 12%, very high. Janet and Dave decide they are fully able to pay monthly payments, and pay at 12% for three years. After the third year, the interest rate is lowered to 7%, and then three years after, it is changed to 6%. In six years, the interest has dropped a total of 6%, lowering the interest and monthly payments.
At Presidio Mortgage, our loan officers are available 24/7 to help you choose the financing option that best suits you. Visit us at www.maxwellpetty.com to find out if a Georgia Adjustable Rate mortgage is an option for you.