FIXED RATE MORTGAGE

30 Year Fixed

The grand daddy of all loans.  The rate and payment are fixed for 30 years and the loan pays itself back over a 30 year period.

Pros

  • The rate never changes
  • Stable payments
  • Low monthly payments
  • Great tax deductions since payment is primarily interest for many years

Cons

  • Who wants a mortgage payment for 30 years
  • Higher start rate than Adjustables and shorter term fixed rates
  • The first 15 years are primarily interest, very little principal reduction
  • If rates decline, your rate will remain the same

20 Year Fixed and 15 Year Fixed

The two loans are very similar in concept. Both loans have a fixed interest rate for the life of the loan and amortize over 20 and 15 year periods respectively

Pros

  • Rate never changes
  • Principal paid back quickly
  • Stable payments
  • Better rate than 30 Year Fixed

Cons

  • More money to lay out monthly
  • Less tax deductible interest
  • Extra money spent on higher monthly payments may be better invested elsewhere

 

ADJUSTABLE RATE MORTGAGES

Short Term Adjustables – 1 and 3 Year ARMs (Adjustable Rate Mortgages)

The rates on these loans are set for the introductory period of 1 or 3 years at what is commonly known as a “teaser rate." After this introductory period, the rate is typically tied to a preselected index plus a margin. The most common index used is the One Year Treasury and the margin is commonly 2.75%. These loans typically have periodic caps over the “teaser rate” of 2% as well as lifetime caps of 6%. These loans typically amortize over a 30-year period.

Pros

  • Very low start rates
  • If you intend to move shortly, low rates are very attractive
  • If your budget is tight, these loans can help you afford a loan today
  • When rates are low, you seem like a genius

Cons

  • That low rate doesn’t last forever
  • If rates go up, you have to sit in the corner with your dunce cap on

Long-Term Adjustables – 5, 7 Year ARMs (Adjustable Rate Mortgages)

Commonly referred to as Five/One (5/1) ARM or Seven/Three (7/3) ARM, indicating the length of time the “teaser rate” is fixed, 5 or 7 years respectively, and how often the loan will adjust after the initial fixed period, 1 or 3 years respectively. After this introductory period, the rate is typically tied to a pre-selected index plus a margin.  The most common index used is the One Year Treasury and the margin is commonly 2.75%.  These loans typically have periodic caps over the “teaser rate” of 2% as well as lifetime caps of 6%.  These loans typically amortize over a 30 year period.

Pros

  • Start rates tend to be lower than fixed rate mortgages
  • More stability than short term ARMs
  • If you know that you will own the property for a maximum of 5 years, a 5/1 ARM can be the perfect product

Cons

  • What if you guess wrong about how long you will own your property
  • The rate can change after the introductory period ends