Ask Linda? Financing Commentary - Volume 4
Fixed Mortgage vs. Adjustable Rate Mortgages
Are you still baffled by all of the mortgage loan options these days?
Fixed rate loan- vs. adjustable rate loans? Your neighbor brags to you about their (see lender) arm. rate at the BBQ...Your friend at work tells you that if you don't get a fixed rate mortgage, that you'll probably lose your home. Which way do I go Lynda?
According to the Wall Street Journal, 35% of homeowners with adjustable rate loans had no idea how much their mortgage rate could increase. 41% of these people couldn't tell you what the maximum interest rate was for their loan. Most homeowners didn't know the index of interest rates that their loan was tied to for determining their rate adjustments. Clearly, many homeowners are unaware of their rate reality. I suggest digging through your paperwork, and finding out the truth. If your mortgage loan is about to turn into an adjustable rate mortgage, it may be time to convert your loan into a fixed rate mortgage.
Are you still confused by all of the mortgage loan options these days?
Tell your friend at the BBQ has an option arm loan that started at (see lender). That is a negative amortization loan that experts call risky. These loans offer a lower intro rate with a catch. With negative amortization loans, your principal balance increases with payments, rather than decreasing with payments like most simple interest loans. These loans were designed for self-employed people who had cash flow issues. The other concern with the loans is subordinate financing. It is very difficult to do a second mortgage behind a negative amortization mortgage. There are home equity loan options, but the rates are higher, and not many lenders offer these second mortgage loans.
As far as your friend at work....If you make your mortgage payments in a timely manner, you will never loose your home. Getting into a fixed rate mortgage is a good idea if your loan is going adjustable this year. Lock in your mortgage rate while the rate are in the 6% range. If you plan on staying in your present home for a while go with the fixed rate loan and don't look back.
By Lynda Nelms
Sr. Loan Officer & Financial Consultant