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Which is best for you?

Dave Ansel, Superior Home Mortgage

With 30 year fixed interest rates hovering around a 40 year low, many people often overlook an adjustable rate mortgage when purchasing or refinancing their home.

While the fixed rate mortgage is definitely the safest, it may not be the most cost effective in many situations. An adjustable rate mortgage offers an alternative to the oftentimes-higher rates on a 30-year or 15 year fixed rate mortgage. This can save you money.

In most cases, the longer that the loan has to be guaranteed, the higher the rate will be. Conversely the shorter the guarantee period, the lower the interest rate.

Here’s an example: A loan of $200,000.00 on a 30 year fixed rate of 6% would equate to a monthly payment of $1,199.10 for principle and interest. That same loan on a 5/1 adjustable rate (in this example the 5/1 ARM has a fixed rate for the first 5 years and then adjusts every year after that), the adjustable rate is 4.5% and the monthly payment is $1,013.37 per month. The savings per month would be $185.73 using an Adjustable Rate Mortgage. Over the first 5 years, the savings would be $11,143.80!

That’s a tremendous savings, especially if you consider that most people are only in their home an average of 5 to 7 years!

What do you do if you plan to stay in the home longer than the 5 year period?

You have several options:

Stay with the 1 year adjustable. If you had had the adjustable mortgage for the past 5 years your current interest rate would be 3.82% (based on a margin of 2.5% and using the 1 year t-bill as an index). Most lenders offer very attractive interest rate caps to protect you in an increasing interest rate environment.

Refinance to a fixed rate. With refinancing you would incur some costs, however compared with what you already saved, you’re still way ahead.

The savings can be very inviting, especially when you’re buying your first home and need to stretch your monthly income. You can use the savings to make improvements or furnish your home. Another consideration is that in the 5 year time frame, your income may increase, and after the fixed period, you may be in a better position to afford a higher fixed rate mortgage.

Choosing the right financing is a very important part of the home buying and refinancing process. The options are many and the ability to choose the right one is often times confusing.

Your best bet is to consider all of the options and compare them with your budget and your future plans. Contact a local lender for more information.

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