Finding the right home loan is important for securing your family’s financial future. For most people their mortgage payment is the largest bill they have and can make the difference between living comfortably, saving money, or living pay check to pay check. An experienced mortgage banker can help you to identify which type of home loan meets your families needs.
When evaluating mortgage loan options it is important to understand that there are multiple choices and the loan needs to match your financial goals.
Here are some tips for deciding if an adjustable rate mortgage (ARM) or fixed rate home loan is right for you.
Adjustable Rate Mortgage
• You plan on staying in your home short term (ideally less than five years). This works well if you are living in an area on a temporary assignment, in the military, or buying a starter home.
• You are not risk adverse. An ARM loan is risky. Once the initial fixed term is up you don’t know what your interest rate will be. For example if you have a 5 year ARM loan at 4% your loan rate and payment will stay the same for five years. After that period it will become adjustable based on the current market. It is impossible to know what the market will do when your rate expires. You could save money or end up paying more.
• You need a lower monthly payment. ARM loans are fantastic solutions for people that need a lower mortgage payment. For example if you want to go back to college a lower mortgage payment could allow you to pay for it. Once you have graduated you will no longer have that expense and can afford to refinance.
Fixed Rate Mortgage
• Focused on retirement. If retiring is top on your to do list, consider a fixed rate mortgage. The set pay off date will make your financial planning easier.
• You plan on living their forever… If you are living in your dream home and plan on never leaving – get a fixed rate home loan. While an ARM could lower your payments in the short term it is not worth a long term risk of ending up with a payment you cant afford. Keep your dream home safe with a fixed rate mortgage.
• Risk adverse. If the unknown keeps you up at night – you need a fixed loan. The financial markets change constantly and there is nothing you can do to control it. Don’t lose sleep or start panicking, just secure a loan you can live with.
• Love to pay off debt. If getting out of debt makes you excited than a fixed rate loan is right for you. With a clear pay off date you can count on paying off your mortgage in full and having one less bill to worry about.
If you are currently in the wrong loan, don’t worry. A simple call to your mortgage lender can be the solution. You can refinance from an ARM to a fixed rate loan using a variety of loan programs including the HARP refinance program for people with an 80% loan to value or higher. There are many options available to home owners so contact your mortgage banker to get a quote that fits your family’s financial goals.