This means that with the housing market the way it is, you can buy a house now at a good price and lock the mortgage in at a low interest rate for many years. The result of this is that you can budget your monthly expenditure, and live within your means while you pay down your house.
So with the offer of this relative realty security available, why do so many buyers opt for the variable rate mortgage? Perhaps it is because the gambler in us all thinks that we can beat the odds! And sometimes we can, hence the temptation.
Variable rate mortgages are also called Adjustable Rate Mortgages (ARMs) and they fluctuate according to the interest rate, therefore making it difficult to budget. What's more, if you are on a tight budget (and what new home owner isn't?) then signing up for an ARM can be stressful. You will find yourself watching the news all the time and your stomach will lurch when there is news of an interest hike. So why do we do this to ourselves?
Fixed rate mortgages and ARMs are made up of two components: the monthly repayment and the interest payment. With a fixed rate mortgage these two amounts stay the same for the duration of the number of years that you 'fixed' it for. With an ARM the interest part of the monthly payment can change up or down according to the money market and this change in the interest rate will change the amount of money that you have to pay each month.
Each ARM varies according to its own pre-agreed index which in turn alters your interest rate. There is always a margin involved here, and a 'margin' is your percentage that is added onto the index rate. Sounds complicated but look at an example: your ARM mortgage payment is comprised of (1) the lenders index plus (2) your agreed margin. These two together add up to the fully indexed rate that you are charged. Say your margin is 3% and the indexed rate becomes 4%, this means you will be paying 7%
There are 'caps' in place which make it sound as if you are protected. For instance you can have a limit on the amount of the increase per annum, and a limit on the amount of the increases over the entire life of the loan; there is also what is called a payment cap.
If you still feel you want to go the ARMs route, then get a written disclosure from your lender and make sure you understand it. However, any reliable broker will point out that choosing a rate that will fluctuate at a time when the fixed interest rates are low is not sound financial sense.
When the market is already offering a low rate that you can fix in and avoid worry, it makes sound economic sense to shop around and find that deal.
Arm Vs Fixed Rate
Many questions are often asked by people who have never bought a house before because they lack the necessary knowledge and experience that it takes to save quite a bit of money throughout the home buying process. The options that are available for people to use when buying a new home continue to increase everyday, and therefore customers must continue to update themselves on new systems, regulations, and loans that companies come up with. One of the first and most important things to understand is the terminology that is used when buying a new house.
The first important step is to understand what a mortgage exactly is and the different types of mortgages that customers can apply for. The following paragraphs help to address these two separate issues in a simple and concise manner.
Mortgages have become somewhat complex, but the easiest definition is the money that is borrowed to purchase a house. The mortgage is paid off through monthly payments throughout the course of the next ten, twenty, or even thirty years. The companies that offer mortgages to people earn their money through the interest rates and monetary fees that are attached to these loans and that accumulate over time.
There are many different types of mortgages that are available to people with desires of buying a house, but they must first consider which kind of mortgage will best fit their circumstances. People should realize what kind of income they have and the various options that will allow them to quickly pay off the loan. There are basically three different kinds of mortgages that people can apply for, which all have their positive points and negative points.
The first two types of mortgages are the most common, and they include fixed rate mortgages and adjustable rate mortgages. An FRM carries a single interest rate throughout the entire time period of the loan contract. On the opposite end, an ARM has a continually changing interest rate that fluctuates with the success or failure of the housing market.
Another type of mortgage that is often overlooked is called a balloon mortgage, which has many similarities to the two other types of home mortgages mentioned above. A balloon mortgage has a fixed interest rate for the first few years, and then the interest rate changes just like an ARM. Instead of changing the interest rate to match the trend of the housing market, the remaining balance of a balloon mortgage after this first period of time is completely refinanced and a completely new interest rate is attached to the new contract.
One advantage of a balloon mortgage is that it is very easy to understand. Unlike ARM and FRM mortgages that have hidden fees and financial penalties buried within the loan contract, balloon mortgages are rewritten every few years with a new interest rate attached to it. This makes the educational process of mortgages much simpler and helps the borrower to truly understand the concept of working with different kinds of home mortgages.
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