A Bamboozling Dilemma: Fixed Rate or Adjustable Rate Mortgage?

A lot of people who plan to buy a house often wonder what kind of mortgage is right for them: an adjustable rate mortgage or a fixed rate mortgage. To be able to determine the suitability of a mortgage type, potential buyers should familiarize themselves with the advantages and disadvantages. This way, they enable themselves to come up with informed decisions.

Depending on the term of the mortgage and a borrower’s financial needs, both the adjustable rate mortgage and the fixed rate mortgage are appealing to various types of homebuyers. But it is essential that homebuyers become aware of the difference between the two kinds of mortgages.

An adjustable rate mortgage, or an ARM for short, is commonly known as a variable rate mortgage. This mortgage features an interest rate linked to an economic index. Interest rates and mortgage payments are occasionally adjusted in keeping with the changes in the said index. The primary interest rate for an adjustable rate mortgage is lower compared to the rate of a fixed rate mortgage, which features an interest rate that remains unchanged for the entire life of the loan. In contrast to the fixed rate mortgage, the adjustable rate mortgage offer borrowers the choice to make an early repayment of the initial principal borrowed without a penalty charge.

A principal reason why you should consider an adjustable rate mortgage is that you may end up with a lower monthly mortgage payment. Because you’re taking a risk with unpredictable interest rates, you are rewarded with an initial rate that’s lower compared to an adjustable rate mortgage. You can consider an adjustable rate mortgage a good option if: you plan to stay in your home for only a few years; you anticipate an increase in your future income; or, the existing interest rate for a fixed rate mortgage is too high.

One disadvantage of the adjustable rate mortgage is that there is a risk that the rates will rise on you, which means that your monthly mortgage payment will increase significantly. It is possible that the payment can get too high that you may have to default on your loan.

On the other hand, a fixed rate mortgage features an interest rate that is fixed for the entire life of the loan, even if the mortgage lender’s interest rate rises and falls in the future. Because the payments are predetermined, homeowners can budget the amount they need to set aside for their monthly mortgage payment. They can also afford to plan their finances for the long-term.

The drawback is that this type of mortgage comes with higher interest rates. Also, with a fixed rate mortgage, lenders often set up a prepayment penalty that dissuades borrowers from paying off their mortgage early or refinancing their mortgage loan with a lower interest rate. This type of mortgage also puts borrowers at a disadvantage when interest rates fall. However, borrowers can shift to a mortgage program that enables them to benefit from lower interest rates. One way to do this is to qualify and pay for mortgage refinancing.

Compared to an adjustable rate mortgage, the fixed rate mortgage is a more attractive choice for borrowers who opt for a long-term plan. The fixed rate mortgage also offers more security for buyers and is best suited for homeowners who wish to keep their houses for a longer period of time.

Why You Should Go for Fixed Rate Refinance

Are you part of the group of homeowners who have been looking at fixed rate refinance in order to get their dream home? If so, then you definitely need to be aware of how you can easily get your own low mortgage rate which is at the same time a variable of fixed rate refinance right before your ARM has undergone a reset. Just like fixed rate refinance, adjustable rate mortgages are also quite popular. The former can allow you a respectfully low initial payment option even for the same amount which a buyer will spend on their own home.

Then again, there are a lot of buyers who do not look into fixed rate refinance because they are somewhat afraid that their interest rate will end up fluctuating and adjusting. Truth be told, the interest rate will always end up adjusting upwards. In fixed rate refinance terms, it is part of one’s stock mortgage knowledge that buyers do end up trying to ignore that their own time is running and that even with a quite massive publicity that ARMs or adjustable rate mortgages have been accepted, there is a lot of hard work left to do on both sides of the fence.

Additionally, in fixed rate refinance one will see a lot of buyers buying so many adjustable rate mortgages but end up using yet other refinancing schemes in order to settle their rates before the reset or the refresh happens. While historically, the fixed rate refinance of many home values have risen considerably in the past couple of years, the buyers have yet to acknowledge the fact that there are better way to do refinancing for their dwellings and convert it into fixed rate mortgages at somewhat low interest rates and also to get them to pull out the home equities at the same time.

Of course, the reality is that there are some buyers who are located in areas that have ended up counting on the actual historical value their home has will find that they have waited too long in order to take advantage of the fixed rate refinance scheme because of the upsurge in real estate depreciation. Because there is a decline in the value of homes that had left many a buyer with a lot of adjustable rate mortgages and are yet unable to find some fixed rate refinance in order to secure their homes, they realize they have ended up with no collateral to continue the loan.

This might possibly be the worst nightmare for any homeowner, which therefore further solidifies the importance of fixed rate refinance. Then again, have no fear even if you find yourself stuck in such a scenario. There is always a way out and that way, of course, is to find an estate agent who is willing to do the reworked paperwork for you in order to get a fixed rate refinance. This is basically your best bet out of all the options and just might see you in getting your home back.

Refinance Options – Fixed Rate vs. Adjustable Rate Mortgages

When is a good time to refinance your mortgage to a fixed rate loan?

The very best time to refinance is when the interest rates are at an all time low. If you’re waiting for this option, you’ll want to follow the market and keep an eye on what direction our financial leaders are heading. Usually it’s based on the status of our economy and there is a lot of discussion about it before the prime interest rate moves in either direction. Keep your ear to the ground.

It’s also a good idea to refinance to a fixed rate if you plan on living in your home for the life of the loan. Ninety percent (90%) of our population moves to a new or different home for one reason or another within 5-7 years. But, there are those who stay put and want the stability of steady payments. It makes financial planning much easier to know for certain how much your expenses are from month to month. If you are one of these people, your best refinance option is a fixed rate mortgage.

By all means… if you can’t sleep at night worrying about the ups and downs of your mortgage payment, then contact a good mortgage broker and start the refinance process right away. It’s not worth the stress!

When is a good time to consider an ARM?

When you DON’T qualify for the purchase of a home or refinance to a fixed rate mortgage. Sometimes this is the only way to qualify for a purchase due to credit history, debt to income ratio or not enough income. Later on you can refinance into a fixed rate loan if the ARM loan makes you nervous.

When your monthly payment, after the refinance, will be significantly less than the total of your current payment plus the payments of all your credit cards and loans. If you’re in a home for 5-7 years and you are paying 10, 15 or even 20% interest rate on consumer debts, refinance your mortgage and use your equity to pay off your high interest debts. This will make a significant impact on your monthly cash flow and may give you the necessary breathing room you need.

When you DON’T plan on staying in your home for more than 5-7 years due to family size increasing, kids going off to college, job relocation, etc. Why pay for a higher fixed rate long term mortgage if you are only going to move or refinance in a few years anyway.

Homeowners who refinance with long term fixed rates pay between 1.00-2.00% higher than those who refinance with an ARM. That may not seem like a lot but when you have a $250,000 mortgage, it makes a BIG difference in your payment.

When you CAN anticipate increases in your income due to promotions and raises. Some employees receive a raise each year based on a percentage of their current income and can come relatively close to determining what their raise will be. If you’re due for and expect to get a promotion, you’ll probably know ahead of time what that new position will pay you. These are perfect opportunities to consider a refinance.

When you ARE comfortable with moderate adjustments in your mortgage payment. Some people are just more relaxed about finances than others. Most often this is due to not having to worry about their basic survival needs and having a steady, generous income.

What it all boils down to is level of risk. If you can’t sleep at night unless you know your mortgage payment is $XXX.00 every month, then a long term fixed rate mortgage is the best option for you.

If you can sleep at night taking some calculated risks, other options may be available to you.

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Fixed or Variable-rate Mortgage?

“Wow!” you say to your spouse as you hit the brakes on the car. “Did you see the mortgage rate those guys are advertising?” Your worries are over, you’re thinking. Just lock in a rate like that for the next ten years, and you’ve got it made.

Not so fast. That rate may not be the one for you. Typically, the lowest available rate – and the one that makes the rate sign look great from the street – will be for a variable or adjustable-rate mortgage. That rate has the potential to be like a roller coaster. The posted variable or adjustable rate is the rate you’re getting today. Unless you have an economic ouija board, you won’t be able to predict what kind of ups and downs are ahead of you.

Let’s take a closer look. A lender will offer different rates for different types of mortgages. The rates are determined based on financial risk -to the institution and to you. When a customer is willing to take on the risk, he/she is rewarded with a lower rate. If the lender is taking on the risk (that is, the customer is promised a particular rate… regardless of what happens in the future), the rate is higher. The longer the term, the higher the risk for the financial institution.

So how do you decide? Fixed-rate mortgages, because they require a low risk tolerance, are usually better suited to first-time buyers or those who haven’t owned a home for a very long period. Ask yourself these questions: Do you like or need to know exactly what your payment is going to be over a longer period of time? Do you want to avoid the need to consistently watch rates? Do you have less than 25% down? If you answered “yes” to all, or most of these questions, a more conservative fixed-rate ontario mortgage could be the better choice for you.

A variable or adjustable-rate mortgage is best suited to people who have a flexible budget and can tolerate higher risk. Ask yourself these questions: Do you watch market conditions? Can you handle any sudden rate increases that could increase your payment? Do you have 25% or more equity in your home? If you answered “yes” to all, or most of these questions, a variable or adjustable-rate mortgage might best suit your needs.

Some lenders offer a special promotional rate for the first few months of a variable-rate mortgage, which you should discuss with your mortgage broker. Also discuss what your rate will be based on – prime minus 0.5% or 0.6% or on Bankers’ Acceptances (BAs) plus 1%. The latter being a new kind of adjustable-rate mortgage that has recently been introduced to the marketplace. Most variables or adjustables allow you to exercise an option to “lock in” a fixed rate at any time for the remaining portion of your mortgage term or for a longer term.

If the uncertainty of a floating rate is going to give you sleepless nights, you’re in good company. Many Canadians prefer the certainty of a fixed-rate mortgage. They know exactly how much they will pay over the term of their mortgage, and they can plan accordingly… with no financial surprises. But if rates do drop… and drop… and drop… you are committed to the “promise” that you have made. Your best option – have a mortgage broker help you decide which option best meets your needs.

Should I get a fixed rate mortgage if I plan to remodel right away?

Hi all,

I am planning to buy a house with 5-10% down, but I want to remodel the kitchen and bedroom within the next two years. I expect this will add to the value of the house, making my loan-to-value ratio closer to 80/20. Do you think I should get a mortgage with an ARM, if it has a better rate, and then refinance once the remodeling is complete? Any other suggestions for the mortgage?