ARMs versus Fixed Rate - a No Brainer!

The mortgage rate right now is very enticing - being the lowest it has been for several years. At the moment, you can negotiate a fixed rate mortgage for around 6%.

This means that with the housing market the way it is, you can buy a house now at a good price and lock the mortgage in at a low interest rate for many years. The result of this is that you can budget your monthly expenditure, and live within your means while you pay down your house.

So with the offer of this relative realty security available, why do so many buyers opt for the variable rate mortgage? Perhaps it is because the gambler in us all thinks that we can beat the odds! And sometimes we can, hence the temptation.

Variable rate mortgages are also called Adjustable Rate Mortgages (ARMs) and they fluctuate according to the interest rate, therefore making it difficult to budget. What's more, if you are on a tight budget (and what new home owner isn't?) then signing up for an ARM can be stressful. You will find yourself watching the news all the time and your stomach will lurch when there is news of an interest hike. So why do we do this to ourselves?

Fixed rate mortgages and ARMs are made up of two components: the monthly repayment and the interest payment. With a fixed rate mortgage these two amounts stay the same for the duration of the number of years that you 'fixed' it for. With an ARM the interest part of the monthly payment can change up or down according to the money market and this change in the interest rate will change the amount of money that you have to pay each month.

Each ARM varies according to its own pre-agreed index which in turn alters your interest rate. There is always a margin involved here, and a 'margin' is your percentage that is added onto the index rate. Sounds complicated but look at an example: your ARM mortgage payment is comprised of (1) the lenders index plus (2) your agreed margin. These two together add up to the fully indexed rate that you are charged. Say your margin is 3% and the indexed rate becomes 4%, this means you will be paying 7%

There are 'caps' in place which make it sound as if you are protected. For instance you can have a limit on the amount of the increase per annum, and a limit on the amount of the increases over the entire life of the loan; there is also what is called a payment cap.

If you still feel you want to go the ARMs route, then get a written disclosure from your lender and make sure you understand it. However, any reliable broker will point out that choosing a rate that will fluctuate at a time when the fixed interest rates are low is not sound financial sense.

When the market is already offering a low rate that you can fix in and avoid worry, it makes sound economic sense to shop around and find that deal.

Use AffinityProperties.com as your one-stop source for information about Austin Texas real estate. Award winning, local Austin REALTOR ®, Joe Cline will be happy to assist you with your questions and concerns about the Teravista real estate market.