Adjustable Rate Mortgage Loans?

[Thomas Garcia]

Hi,
I am planning to buy a house of my own and have not been able to decide as to whether to go in for Fixed rate or Variable rate Mortgage. I have also heard of Adjustable Rate Mortgage Loans and would like to study about its suitability considering the other trends of the market. Would someone give me an idea? Thanks!

[momof1in150]

FIXED RATE - many people are losing their homes right now because their adjustable rates are adjusting and they can't afford their mortgage. Adjustable rates are just a way for lenders to get you into a house that you can't afford.

[irmanator]

yes a girl I work with lost her house recently because of adjustable rates. go with fixed then you know what it always will be.

[skydivingchic]

Fixed rate. Rates right now are still pretty low compared to historical rates. That means that reasonably, rates have nowhere to go but up.

The only possible exception I see is if you are absolutely sure you will be selling the place before the rate adjusts.

[Hypersion]

The yield curve is still fairly flat so it makes little sense NOT to get a fixed rate.

[zetta]

You really can't go wrong with a fixed rate right now.

On the other hand a 10/1 adjustable -- where it's fixed for the first 10 years and then can only adjust upward by 1 % per year may make sense if you are in your 20's or early 30's and there is a high probability that you will move (to another city or a larger house) within 10 years.

[Coleroo]

How long do you know for certain you will be staying in your home?

The typical loan package thrown out there seems to be the 2 year Fixed / 28 year ARM, so i'll base what i say on that -

If you are absolutely positively staying in your home for less than 2 years and then absolutely positively moving out and selling in 2 years - then you can look into an adjustable rate (one where the rate is usually fixed for 2 years, then can swing wildly to the current market rate). An adjustable rate helps save money in interest at first, and is a good option if you dont want to blow a lot of cash on interest in something that you dont plan to settle down in.

For lengths over 2 years, a fixed rate (one where the rate remains the same as the day you purchased until the loan period is over) is the way to go. Fixed rates are so low nowadays theres really no reason not to get one.

I had a friend who purchased a house without having a clue what the ARM or Fixed rate meant. She signed for a 2 year fixed / 28 year ARM. When the 2 year ended in March of 2006, her payments went up by $200 per month because of the increase in interest (interest = "money wasted"). Do you want to endure that?

I would advise to stay away from a balloon mortgage should you encounter one! You'll waste lots of money on it.

Also, don't be afraid to say "NO" to any package offered by a broker or banker. Do your research and be prepared to tell them WHAT you want. A good broker will be able to find you anything you ask for, within reason. If you don't do your research, you'll be thrown a package and be tempted to sign on the (million) dotted lines just to get it over with. My first package (we were first time buyers going for 100%) was an 85% arm with a 15% balloon. I read over the terms, took it back, and said "No maam and no thanks - THIS is what i want..." ...I had been told the first package was as good as it gets for first timers. I reiterated what I wanted, and BAM within 2 days my broker found me a loan package for exactly what i wanted and what i knew our family needed (30 yr fixed) - and the monthly payments were $60 LESS than the original package. geez keep doing your homework!

[LivingAlmostLarge]

I got a 7/1 Arm in 2005. I'm planning on moving before the 7 years. Even if we stayed our mortgage will cap out at 9.25%. Not terrible. Chances are it won't be that high. It will also be limited at a 2% increase per year so it will take 3 years to get to 9.25%.

We knew what we were buying when we got in. We bought it because we could afford the payments at 9.25% and anything lower would be gravy. Plus we knew we were moving in 7 years because we have a townhouse and would like a single family home. 7 years seemed a good compromise to get there. Enough time to build equity and have one child. Then we move cross country and buy something else.

But everyone's situation is different. You have to evaluate your future.

[jIM_Ohio]

If you think interest rates will go up, get a fixed rate loan.

If you think interest rates will drop, get an adjustable rate loan.

If you are not sure, error on the side of fixed rate loans.

Most businesses like to keep costs as fixed as possible- might be good idea to follow that logic with household budget as well.

[vsjhoc]

I bought my first house in 2001, and when I refinanced in 2005 my broker asked me how much longer I planned to live in the house. I asked if I could borrow his crystal ball -- you know, the one that showed what interest rates would be at any given time.

I took a 10/1 ARM -- I figured that within 10 years either (a) I would have sold the house or (b) interest rates would have gone up and then down again and I could refi at a fixed rate.

That said, if I were buying my first house today, I'd go for the fixed rate. You don't want to be forced to sell because you planned to stay in the house for X period of time and then something happened. As we all know, life is what happens while we're busy making other plans.

[anonymous_saver]

Originally Posted by LivingAlmostLarge

I got a 7/1 Arm in 2005. I'm planning on moving before the 7 years. Even if we stayed our mortgage will cap out at 9.25%. Not terrible. Chances are it won't be that high. It will also be limited at a 2% increase per year so it will take 3 years to get to 9.25%.

We knew what we were buying when we got in. We bought it because we could afford the payments at 9.25% and anything lower would be gravy. Plus we knew we were moving in 7 years because we have a townhouse and would like a single family home. 7 years seemed a good compromise to get there. Enough time to build equity and have one child. Then we move cross country and buy something else.

But everyone's situation is different. You have to evaluate your future.

9.25% not terrible? I think that would be horrendous. I guess your right, everyone's situation is different.

[jIM_Ohio]

Originally Posted by anonymous_saver

9.25% not terrible? I think that would be horrendous. I guess your right, everyone's situation is different.

read deeper, it's 3.25% now which might cap at 9.25% in 3 years, 2% increase per year.

[anonymous_saver]

Originally Posted by jIM_Ohio

read deeper, it's 3.25% now which might cap at 9.25% in 3 years, 2% increase per year.

Don't assume either. I read that and understood that the 9.25% was a potential rate. I was just commenting on how horrible that would be.

[LivingAlmostLarge]

It will cap in 8 years @ 9.25%. That's not horrible, right now the rate is 4.25%. Lifetime 5% cap and 2%/annually.

First, that's the potential top rate in 8 years! Do you know if you'll be living where you live in 8 years?

Second do I believe we'll be moving in 8 years. Why? Some reasons we're 28 and 30 now and we live in a townhouse. Great for DINKS but we want children. With 3 stories, it's layout is not condusive to children. Very dangerous, and the master bedroom is on the 3rd floor and 2 bedrooms on the second floor. So moving to a single family home within the next 8 years is a strong likelyhood. Is it unlikely that a couple who are so young would want to live in a single family home in their 30s?

Another reason we'll move, is that I am a student. DH makes the majority of our income, so affording 9.25% is easy if I went and got a job. I'd probably double our income to $250k+. So we knew when we bought we were buying on one person's salary.

So how would it be horrible? We got a great rate for 5 more years, and we have 3 years of play before it hits 9.25%. A 30 year rate would have costed more easily over the 10 years.

Chances are we're out of this house in 7 years. Another factor is we don't like where we live. Not area, but rather greater location, northeast. We plan on moving back to our families on the West Coast as soon as school is done. So for us before we bought we knew about 5-7 years for schooling.

So it'll be 8 years until we hit 9.25%. Was I wrong in making these considerations?

1. townhouse versus single family
2. income
3. area
4. DINKS versus kids

Adjustable rate mortgages aren't the problem. PEOPLE are. My in-laws are CANADIAN. They nearly cried when we said we were thinking 30 year fixed! To them it's sacriligious. They only got 5/1 Arm and renegotiated with the bank every 5 years! That's how it's done there. Are Canadians bankrupt? No.

So obviously it's not ARMs, it's how they are handled. If as a society Canadians, UK, and Aussies can manage Arms more responsibly than Americans what is the problem? If their typical mortgage is adjustable, why then are Americans so against them?

It might be due to the fact Americans are irresponsible. But they like to blame everyone else for their CC debt, mortgage debt, car loan debt.

[anonymous_saver]

I think a potential 9.25% mortgage rate is awful for many reasons. Whether you have a larger income or not, I feel like it is a waste of money to pay additional interest on something when that money could be going somewhere else.

I agree that one of the big problems of an ARM is how people individually conduct their finances.

Personally, I would never own a home without a fixed rate loan. That's fine that you would choose an ARM, that's your choice.

To be honest, I've never paid a penny of interest on anything in my life. I paid off my graduate school loans in full before they were out of deferrment, and I only have a credit card in order to build a FICO score to buy a house someday soon. I am 25 and make "only" $36,500+ year. My plan in my life is to only pay interest on my home loan.

[zetta]

In Australia you can't even get a fixed rate loan!

With an ARM that is fixed for 7 or 10 years, you can always look around a year or two before the fixed term is up, and refinance to whatever rate is currently the best deal. Plus, people in the earliest years of their careers can be reasonably certain that they will be getting raises during the intervening years. For us, using a 10/1 ARM instead of a 30yr fixed made the difference between my being able to stay at home with my kid(s) during the early years and having to put them in daycare. Staying home now is worth the risk of paying more interest later when I am earning more money.

[LivingAlmostLarge]

Thank you zetta for demonstrating that what is common in America is not common in the rest of the world. And money is also determined by society.

Anonymous saver, great for you for never buying anything on interest. I bought at house at 21 making $30k in San Diego. Do I have student loans? Yes I had them in undergraduate and DH has them now doing an MBA.

DH financed his first and only car. Sorry he just moved internationally and he didn't have the entire cash for the car. He used all his money to come, but hey that's life.

Anonymous Saver, why do you assume I'm going to be paying 9.25%? Did you not read my post? I pay 4.25%, and I'm pretty sure I'm out by the 7 year mark. Um, so how am I paying more interest? If anything I just saved 1.75% interest for 7 years on $450k. How much is that? $55k. That's a lot of interest to have saved by not getting a fixed.

How long will it take me? Well I think the break even point is 55 months (5 years assuming an extra $1k in interest/month). That's 12 years right there, assuming I don't move or make a single extra principal payment in the next 60 months before the rate even adjusts.

So anonymous saver do you really think I'm going to not move in the next 10 years? Hmm..

If anything I'm coming out way ahead by looking long term at my goals, future predictions, and lifestyle. I'm saving about 2% on interest while "renting" my house. I don't own it. Instead more is towards principal.

Plus you don't get wealthy by being debt free. It's not about debt free, it's about net worth. Managing risk and properly leveraging your income/assets/debt.

For example no one buys a house in cash. Why? Because you spend years renting, instead of saving for a house in cash while renting.

[loanstar]

fixed rates are especially attractive now because the interest rates have been lowered several times this year!

[Sporkman]

Yikes, I'd stay away from ARMs...

[MonkeyMama]

The thing about ARMs right now is they are no longer a deal. I get what Zetta and LivingLarge are saying (living in a HCOL area I see the benefits to a well managed 10-year ARM), but last I looked there was little difference in the rates. I say why take that risk when a fixed rate is just as affordable?

From a historical perspective. 9.25% is also not a terrible deal. Especially since odds are slim that it will come to that.

(Um yeah I just double checked to make sure I wasn't crazy and the 30-year fixed rates EQUALED the 10-year ARM rates at my mortgage company. I am not sure I get the draw with today's rates).