rate or adjustable rate loan?
Fixed-Rate vs. ARM. What's better? It all depends on the current economic climate and your own situation. Interest
rates can vary over time. Fixed rate loans look most attractive while interest
rates are low. That's why homebuyers try to lock-in at a low interest rate.
When rates are high, more homebuyers tend to purchase Adjustable-Rate
Mortgages, often referred to as ARMs, in order to keep their monthly payments
low for the first few years. Sound confusing? Don't be too concerned. Interest
rates go up and down but the fundamental rules of mortgage rarely change.
With a fixed-rate mortgage loan, the interest rate remains the same throughout
the life of the loan. 30-year loans are the most traditional type of home loan,
but 15-year, 20-year or 25-year fixed-rate loans are available, too. Generally
speaking, fixed rate loans are the most predictable. The interest rate doesn't
vary so your monthly payments don't change either.
Adjustable rate loans, on the other hand, are less predictable because the
interest rate can change. The major advantage is your monthly payments will be
lower at first, because ARMs offer an initial rate that is generally 2-3 percent
below a comparable fixed-rate mortgage. Not only will your loan costs be lower;
your purchasing power will be higher because you may be able to qualify for a
bigger loan with an ARM. However, after the initial period the rate adjusts
periodically, and that's a potential risk. Worst case - your loan costs could
climb if rates go up. Best case, your payments could go down if rates drop.
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How long do you plan to be in
your new home? Do you anticipate a job change? Do you plan to move up to a
larger home in a few years? If this is a "starter home," an ARM could
save you money in the short term. By the time your interest rate adjusts and has
a chance to go up, you'll probably have sold your home.
If you plan to own it for the foreseeable future, and interest rates are
currently reasonable, consider a fixed rate loan. With an ARM, consider the maximum monthly payment you might
have to pay under the loan terms? Is your income likely to rise enough to cover
the payments? Are you willing to take that gamble?
Will you be taking on other sizable debts, such as a car or school tuition,
in the near future? Although you can leverage a bigger home purchase now with an
ARM, be cautious about how it could affect family finances later.
It's best to consider your whole financial situation
before deciding between a fixed rate or adjustable rate mortgage
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Mike Burns, CRS,
The Real Estate Group, Inc
5725 Windy Dr Suite E
Stevens Point, WI 54482
Direct: 715 295-5008
Cell: 715 498-1248
Fax: 715 295-5006