Fixed or Adjustable Rate Mortgage?

January 3, 2009
Matt Isleib

 

 

In today’s current market the choice is actually really simple. In times to come when the real estate market gets its footing back and the economy and equity market finds some stability I may change my opinion on this topic but as it stands today the answer is without a doubt or second guess a 30 year fixed!

 

In a different time and different market the answer would be different and seeing as the reason I am here every day pounding the keys is to help educate borrowers, we will look at what the pros and cons would be.

 

30 YEAR FIXED MORTGAGE: Is your plain vanilla choice. The rate is fixed for 30 years, it never changes and you will know what your payment will be for the life of the loan not including taxes and insurance if you have an escrow account.

-Typically fixed rate mortgages are a little higher than say an adjustable mortgage. Usually anywhere from a 1/4 to a 1/2 percent higher.

 

ADJUSTABLE RATE MORTGAGE (ARM): There are only several scenarios in my opinion that make sense for any borrower to choose and ARM for a mortgage.

-One: if you have no intention and are fairly sure that you will be in the home that you are financing for a short period of time. And a short period of time is anywhere from 5 years or less, and then an ARM may be a viable choice

-Two: if you are purchasing a home for an investment and planning on flipping the home or rehabbing the property and selling it. You will have your mortgage and property for a short period of time and an ARM may be a viable option

-Three: if you are doing construction financing and your lender offers an ARM as an option for your construction loan you may want to take advantage of it. The reason being most construction loans require that you find or secure an end loan once the construction is complete. So in this case the term of the loan again is a short period of time.

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