Fixed or Adjustable Rate Mortgage?

First look for a lender who reviews your individual situation, not one who forces you into a particular type of loan. The loan you choose should reflect your life-style and financial goals. And, either loan type, fixed rate or adjustable, has its benefits.

Adjustable rate mortgages (ARMs) offer borrowers reduced initial payments; fixed rate mortgages (FRMs) protect borrowers from interest rate increases. Either loan type, however, could cost more over time given the economic climate, terms of the loan, or personal circumstances of the borrower. Throw in a variety of interest rate caps and terms that make some ARMs behave like FRMs and FRMs behave like ARMs, and you have a lot to consider when your money's at stake. Understand all of your options before choosing a loan program.

When Should I Choose an Adjustable Rate Mortgage?

For first-time home buyers, borrowers "trading up," refinancing or looking for flexibility in managing their debts and investments, adjustable rate mortgages maximize housing dollars. "Home buyers can qualify for larger loan amounts with ARMs -- at lower initial interest rates and monthly payments -- than with fixed-rate mortgages," says Mike Peterson, Washington Mutual Loan Consultant." Better still, ARMs often cost less and provide more flexibility over time than fixed rate mortgages.

These outstanding advantages result from lenders managing your one unknown: the exact interest rate you will pay in the future. Beyond certain rate-lock periods, lenders can't guarantee your future ARM interest rate. Lenders can, however, guarantee your interest rate range. "Look for ARMs that include "caps" to the interest rates you might pay during the life of your loan," says Mike Peterson. Interest rate caps provide protection from drastic interest rate increases and determine the interest rate range for a loan. So, with the right ARM, you can plan your budget as you would with a fixed rate loan. Only, you might owe less.

Know Your Index

To determine the interest rate for an ARM, and consequently what you owe, lenders assign a loan index, such as the 12-MTA (based on the 12 month average of annual yields on U.S. Treasury Securities, adjusted to a constant maturity of one year) or the COFI (11th District Monthly Weighted Average Cost of Funds Index). Changes in the loan's index can affect the interest rate of the loan. The 12-MTA Index, considered one of the most stable indices available, tends to rise and fall more slowly and in smaller rate increments than other indices. Loans tied to the 12-MTA make a sound choice for a home investment, but you will have many choices in a loan index. If you choose an ARM, make sure you know which index your lender uses.

Maximize Your Options

In addition to a variety of interest rate indices, ARMs offer various rate adjustment and payment options. Examining your financial situation and available loan rate and payment options will guide you to your best choice. Some loan programs adjust rates annually or semi-annually and some adjust monthly. Some monthly adjusting home loans offer multiple payment options that give you additional control over your personal finances. Borrowers with varying monthly income or expenses might appreciate making lower minimum payments during leaner months and higher payments in others. Some borrowers might use the multiple payment options to allow them to transfer debt from credit cards to their mortgages -- which offer tax-deductible interest (consult your tax advisor).

ARMs offer flexibility to accommodate changing financial situations. Some ARMs provide the added flexibility of multiple payment options. Learning what's available can save you money.

When Should I Get a Fixed Rate Mortgage?

For borrowers who plan to stay in their homes for a long period of time, many experts recommend a fixed rate mortgage. While FRMs generally cost more up front, payments never change. For those with stable incomes and expenses, it's an easy choice. And, after several years, the monthly payments for a FRM could be less than the monthly payments for an ARM loan counterpart, if interest rates rise considerably.

Homeowners who keep their fixed rate mortgages less than five years, however, could end up paying significantly more than those with adjustable rate mortgage loans. It's best to keep long range goals in mind when selecting your home loan.

It All Sounds So Confusing.

With so many options and details, the lending process can confuse anyone. Lending professionals, qualified lenders or mortgage brokers, can help you review your options and find a loan that's best for you.

3/1/00 Article Submitted by: Mike Peterson, Washington Mutual, 818 601-7049, mikepeterson@netzero.net