Low Fixed Rate Mortgage vs. ARM Mortgage Loans
What is the Best Way to Reduce Home Mortgage Payments?
Oct 24, 2009
The indeterminate nature of interest rate movements can make deciding between a low fixed rate mortgage and an ARM mortgage loan a difficult decision. Each loan works in a completely contrasting way and can assist a homeowner during different periods of the economic cycle. This article will provide a homeowner with the information to make an informed assessment of the benefits of each deal.
ARM Mortgage Loans
An Adjustable Rate Mortgage loan has a fixed rate of interest for a set number of years (1,3, 5, 7 or 10 years). It then reverts to a variable rate of interest based on a financial index, such as the Cost of Funds Index (COFI), London Interbank Offered Rate (LIBOR) and the one-year Constant Maturity Treasury Securities (CMT). The interest rate will then float within a defined range, but will be capped.
Low Fixed Rate Mortgages
Fixed rate lending presents a greater challenge to the lender as it places the onus on them to determine the direction of interest rates. They will attempt to determine a median rate of interest over the life of the fixed period. Unlike an ARM mortgage loan, the borrower knows precisely how much their home mortgage payments will be each month.
Affordable Home Mortgage Payments
- Adjustable Rate Mortgage loans. Whilst it offers homeowners a lower rate of interest for the first few years, this will normally increase over the life of the loan. However, an ARM mortgage loan provides first-time buyers and those who are likely to see their earnings increase with an opportunity to get on the housing ladder. The fixed period can also be useful for individuals who plan to move after x number of years without paying an early redemption penalty.
- Low fixed rate mortgages. This type of loan offers a homeowner consistency. For example, a 15-year fixed rate mortgage will mean that the same home mortgage payment is made for the duration. Whilst repayments will be higher to begin with, the benefits are achieved over the life of the loan. They are particularly beneficial to families on fixed incomes who are unlikely to be able to cope with a sudden increase in repayments.
The majority of homeowners will benefit more from a low fixed rate mortgage due to the stable home mortgage payments and lower average rate of interest of the life of the loan. However, ARM mortgage loans may favor individuals who are just starting out in their professional career or have a definite plan to move home after a certain number of years have elapsed.
 |
 |
 |
 |
 |
