Florida Mortgage Information

Is an Adjustable Rate Mortgage Your Best Deal?

If you’re looking for a mortgage, what kind do you need.  There are hundreds of different programs out there,  and you probably don’t want or need to become an expert on all types of mortgages.  You just need to hire a licensed professional you can trust to find the best program for you.  We’ll talk more about that later.  For right now, you can divide all mortgages up into two basic types, fixed rate mortgages and adjustable rate mortgages (ARM’s).  Although they both have their advantages, many financial experts, including former Federal Reserve Chairman Alan Greenspan, have stated that ARMs are a better deal overall.  I generally agree with them, because ARMs have saved me tens of thousands of dollars over the last 15 years.  This installment of the Top 10 Lists makes a some very good arguements about why you should be considering an ARM for your mortgage.  Right now though, an inversion in the bond market has caused rates on Fixed Rate Mortgages to be about equal to the rate on ARMs, which makes an ARM slightly less attractive.  Still, if the most recent rate hike by the Fed (under new Chairman Ben Bernanke) is their last, and rates start to fall again, an ARM would be a very good thing to have.  Here are the top ten reasons to consider getting one.   

10.  Former Federal Reserve Chairman Alan Greenspan thinks they’re a better deal, and can save you thousands.  Check out the Greenspan Article (will be publish in a later post) to see what he says about ARMs, and how banks and credit unions usually don’t have them, or if they do, they don’t recommend them.  As a result, Mr. Greenspan said “…a Fed study suggested many homeowners could have saved tens of thousands of dollars in the last decade if they had ARMs.”   Now, if rates shoot up, fixed rates are better long term, but with rates slowly rising and apparently stable, and the average person moving and refinancing every 7 years, the risks seem pretty slim.

9.  A variety of options are available, with rates fixed for 3,5 or even 7 years before the rate adjusts.  This means that you can lock in a rate slightly lower than the “fixed” rate mortgages offer for up to 5-7 years.  By that time, you may be ready to move, due to having children, getting a promotion, children grown and leaving, transfer at work, you want a pool, etc.  At this point you’ll have to sell and get a new mortgage anyway, so WHY NOT SAVE THOUSANDS OF DOLLARS BEFORE THEN? 

8.  The rate on your ARM is tied to an “indicator”, such as the Prime Rate, or Cost Of Living Index (COLI).  This means you can see what this indicator has done in the past, and keep an eye on what it is doing (usually listed in Financial section of most newspapers).  Your rate is always some amount (margin) above that indicator or index rate.  So if that index stays stable, the lender can’t raise your rate!  And you can try and pick an index that you’ve researched and are comfortable with, by choosing a mortgage that uses that index.

7.  There are even programs tied to the COSI (Cost Of Savings Index), which is based on what banks pay on savings accounts, and tends to be very stable.  Basically, banks don’t tend to increase what they pay on savings accounts very often or very much, so your rate probably won’t change very often or very much either.  Plus, if your mortgage payment is increasing, the amount you’re making on your savings account funds will be going up too.   

6.  Most ARMs have a cap on the amount your interest can increase each year, and a cap on the amount it can ever increase!  This means no matter what the index rate does, your interest (and thus your payment) can only increase a small amount each year, and there is also a limit on the amount it can increase while you have the mortgage.

5.  Usually, there is NO CAP on the amount your mortgage interest or payment can go down!  So, if the indicator drops substantially from one year to the next, your payment will drop a corresponding amount.  But if it goes up the next year, it can only rise as high as the yearly cap!

4.  There are flexible mortgage programs that allow you to pay either the 15 year or 30 year payment each month.  This means you can start out paying the larger 15 year payment, but if rates do go up substantially over several years, you can switch to the lower 30 year payment with no penalty.  This kind of payment flexibilty usually isn’t offered with Fixed Rate Mortgages.

3.  Even more flexible plans allow you to make interest only payments (or even less!) for a portion of the loan period.  Some even give you this option on a monthly basis!  You normally only have to qualify for the lowest payment option offered, and there is never a penalty or bad mark posted against your credit report for choosing to pay the lowest payment.  Although you’re not paying off any principal with an interest only mortgage, you still gain equity as your property’s value increases through appreciation.  (See previous posts for more info on this)

2.  Interest Only ARMs make it easier to qualify for a larger loan, which can mean you’re able to buy a larger, nicer house in a better neighborhood.  This helps you 2 ways.  Not only do you get the advantage of living in a nicer home in a better neighborhood while you’re there, but larger homes in better neighborhoods usually appreciate faster than smaller homes in less desirable areas, sometimes by double the amount or MORE!  This means you can accumulate equity over twice as fast, even though you aren’t paying off any principal!  The difference between a $180,000 home appreciating at 5% with a conventional mortgage, and a $200,000 house appreciating at 10% with an interest only mortgage would be an extra $13,600 in equity that you could accumulate each year!  At the same interest rate of 6% for both loans, you’d also pay about $80 LESS each month in P&I with the interest only loan on the $200,000 home, versus a standard 30 year mortgage on the $180,000 home!

1.  The rate on a Adjustable Rate Mortgage will usually be less than a similar fixed rate mortgage of the same term (say 30 years).  The average for loans from the same lender is usually about 0.5% to 1.2%, but right now its only running about .25%.  Still, even the smallest difference, plus the additional 0.5-.75% you can save by not going to a bank for your mortgage, means you can save over 1% on your total interest rate!  A 1% difference can save you over $1500.00 a year, and a total of almost $50,000 on a 30 year mortgage for $200,000!  And if the ARM rate does start to shoot up quickly and consistently, you can always cut your losses and re finance to a fixed rate mortgage.  In the meantime, why not save as much as you can, and keep your payment as low as possible.

Still, some people like the security of knowing what their payment will be every month, and rates for both types of loans are very close at the moment, so its impossible to make a definite call as to which type of loan would be best for you.  Now that you have some information and ideas, give a Licensed Mortgage Broker a call.  They’ll find your best options for each type of loan, discuss them with you, and help you make the right choice.

Florida Mortgage Information