Adjustable And Fixed Rate Mortgage Pros And Cons

During the housing market crash in the late 2000s, a lot of the blame was placed on so-called “exotic” mortgage products. These were mortgages that tended to adjust during the life of the loan-sometimes drastically and significantly. Often, they would adjust so much that the homeowner could no longer afford the newly adjusted rate, which would result in foreclosure.

Thankfully, a lot of the more bizarre and unorthodox mortgage products are behind us, but there has been an uptick in adjustable-rate mortgages.

Given the problems people with adjustable-rate mortgages faced in the past,  why are they back in vogue, and what are the advantages and disadvantages of using them?

Adjustable-Rate Mortgages (ARMs)

Taking out an adjustable-rate loan is much like a gamble. You are betting that when your loan interest rate adjusts (which it does every few years), -the mortgage interest rate will go down, and not up-.

Today, with interest rates at a higher level than they have been for some time, many homeowners may see an adjustable-rate loan as a chance to take advantage of a time in the future, when -interest rates go back down.

Many adjustable-rate loans start off with an interest rate that is lower than the current market rate, making them even more attractive and  ideal for buyers who intend on selling property relatively soon, or those who want to flip property. The same advantage applies for buyers in a position to pay off the loan early.  If someone anticipates having the funds, they can pay off the loan early, with the benefit of a lower interest rate before the loan adjusts (potentially higher) later on.

Be Careful of Future Adjustments

Anybody with an adjustable-rate loan should be able to continue to make the mortgage payment, even if the interest rate should rise over the life of the loan, in order to avoid becoming unable to pay, and thus, an ensuing foreclosure.

The more attractive and lower initial interest rate with an ARM can often act as a “bait” to people, who can afford the initial mortgage payment, but who may not be able to afford later potential upward adjustments, if they do occur.

Fixed Rate Loans

Of course, fixed rate loans give people some measure of assurance. With a fixed rate loan, you know what your interest rate is, and what your mortgage payment will be through the life of your loan.

You also cannot take advantage of lowered interest rates—a typical 30-year mortgage is a long time, and rates often fluctuate during that time. You won’t get the benefit of a downward interest rate adjustment with a fixed rate loan.

You can always refinance a fixed rate loan if rates go down, but there are costs associated with doing so.

Exotic Mortgages

Other mortgage products such as interest only mortgages are rare nowadays and should only be considered with great caution. They often end up being more costly in the long run, or later on, when initial promotional rates increase to more than what they were initially.

What does all that paperwork at your real estate closing actually mean for you? Get help with your closing. Contact the Tampa real estate lawyers at Gilbert Garcia Group, P.A. today.

Sources

bankrate.com/mortgages/arm-vs-fixed-rate/#mortgages

bankrate.com/mortgages/pros-and-cons-arm/