If Your Income Is Going To Increase
There are some situations where an ARM can make sense for high net worth or higher-income households, says Greg McBride, chief financial analyst at Bankrate.com. If youre expecting a big increase in income, then an ARM might make sense for you. A doctor finishing their residency is a good example.
The lower payment on an adjustable-rate can offer flexibility if your income is variable or seasonal, he says. But again, he emphasized this only works in extreme cases, for example, athletes or entertainers.
Conventional Loan Requirements And Qualifications
- Loan amount – The loan amount for a conforming mortgage is generally limited to $548,250 for a single-family home, though limits may be higher in regions where home prices are higher. Jumbo loans allow you to exceed the conforming loan limit to borrow for a higher-valued home.
- Down payment – Most conventional loans will require at least 5 percent as a down payment. For loans with lower down payment requirements, explore government-backed mortgages like VA and FHA loans or speak to your mortgage loan officer about other options that may be available. If the down payment is less than 20 percent on a conventional loan, mortgage insurance may be required.
- – Conventional loans are a good choice for borrowers with very good credit, which generally means a FICO score of 740 or higher. There are also established guidelines for income and other personal financial information.
Conventional fixed-rate mortgages are a popular option, but they’re not the only one. Compare mortgage options to learn more on your own, or contact a mortgage loan officer to find out which mortgage option may be the best fit for you.
The Bottom Line: Arm Vs Fixed
Right now, the difference in starting rates for adjustable mortgages is minimal to nonexistent relative to a fixed-rate loan, explains McBride. If youre not getting any benefit but still shouldering the same amount of risk, why bother?
For ARMs to make more sense for people, the spread between fixed-rate and adjustable-rate mortgages would need to increase, which is more likely to happen when interest rates increase overall. Although interest rates have slowly begun to rise from the rock bottom levels of the pandemics, experts predict that rates will remain relatively low for some time.
The current economic outlook only adds to the ARMs dwindling appeal. One situation where ARMs traditionally have made sense is when you plan on selling the property before the rate resets. This strategy relies on housing prices rising or at least staying stable.
While home prices have increased in many areas, driven by record-low mortgage rates and low housing inventory, no one can guarantee this will continue in the long term. And if theres one thing the COVID-19 pandemic has taught us, its the importance of planning for future uncertainty. So, if youre in a position to afford a home or to refinance, locking in a fixed rate is the way to go in most cases.
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How Does A Variable Loan Work
Variable rates are usually pegged to changes to a well-known index, such as the 1-month LIBOR. LIBOR is the interest rate that banks charge one another to borrow money the 1-month means that the variable rate can change monthly. A rate change one month also changes the monthly payment due for that month, as well as the total expected interest owed over the life of the loan.
Is An Arm Or Fixed
Choosing between an ARM and a fixed-rate mortgage is all about risk versus reward. With a fixed-rate mortgage, the borrower locks in a rate for the life of the mortgage. With an adjustable-rate, the borrower takes on the risk of their rate rising in the future. In exchange for the increased risk, the borrower typically gets a lower starting interest rate.
Whether an ARM or fixed-rate mortgage is better depends on your individual financial situation, goals, and tolerance for risk. For most people, the chance of getting a slightly lower interest rate up front isnt worth the instability of an ARM or the risk of significantly increased costs in the future. This is especially true in the current rate environment, where low rates across the board mean that the difference between fixed and ARM rates may be minor.
Also, with a fixed-rate mortgage, you have the flexibility to choose a shorter repayment term, like a 15-year loan. Compared to a 30-year mortgage, a 15-year home loan will have a lower interest rate but higher monthly payments. You may potentially pay more per month, but borrowers are willing to do this to pay off the debt faster and save thousands of dollars in interest payments over the life of the loan, says Nadia Alcide, a mortgage professional with Mortgage Biz of Florida. And the option to take a shorter term mortgage isnt typically available with an ARM.
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Can A Fixed Rate Mortgage Go Up
Even if you have a fixed rate mortgage the monthly payment amount may fluctuate during the life of the loan. However, your monthly mortgage payment may also include interest, taxes and insurance. While your principal and interest amounts will not change, the amount needed for taxes and insurance may.
Is A Fixed Interest Rate Right For You
Before you decide whether to go with a variable or fixed interest rate, lets look at how each rate can affect your loan.
Lets say you take out a 60-month $20,000 loan on a new car at a fixed interest rate of 3.99%, with monthly payments of about $368. Your total repayment amount with interest would be $22,094.
But if the loan has a variable rate, and the interest rate goes up, your payments and the total repayment amount could increase. Conversely, if the interest rate happens to drop, you may save money overall.
Choosing between a fixed or variable interest rate may come down to your comfort level with risk. While you may be able to find a variable-rate loan with lower initial interest rates than a fixed-rate option, you run the risk of the variable rate increasing before youve paid off your loan. If you like the security of a loan payment that wont fluctuate according to the prime rate or other index rate, you may prefer a fixed interest rate.
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Comparing Fixed And Variable Mortgage Rates
You can think of the difference, or spread, between variable and fixed mortgage rates as the price of insurance that lending rates will not increase, more or less. When interest rates are low and are not expected to fall further, it is generally advised to lock in a fixed rate, as variables rates will, at best, stay the same, or increase. On the other hand, if you expect interest rates to fall with some certainty, then a variable rate is preferred, as you will be able to absorb the benefit of paying lower interest. Similarly, if the difference between the variable rate and the fixed rate is significant, it may not be worth paying the premium for the stability protection of a fixed rate.
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Fully Amortizing Payments On An Adjustable Rate Mortgage
On an adjustable rate mortgage, you still have fully amortizing payments even though the interest rate can go up or down at the end of the teaser period. The teaser period is how long your interest rate stays fixed at the beginning of the loan. This period is typically 5, 7 or 10 years. When youre comparing adjustable rate mortgages, its important to know what youre looking at when comparing rates. If you see a 5/1 ARM with 2/2/5 caps, that means that the initial rate will stay fixed for 5 years and change once per year after that. The caps are how much the payment can increase. In this case, the payment could go up 2% on the first adjustment and 2% on each subsequent adjustment. However, in no case can the payment go up by more than 5% over the entire lifetime of the loan. The only thing limiting how much a payment can go down is the margin on the loan, which will be stipulated in your mortgage documentation.
This is not always the case, but its common for ARMs to have 30-year terms. The payment re-amortizes over the remainder of the loan so that your balance will be zero at the end of the term.
As an example, heres an amortization schedule for a 5/1 ARM with 2/2/5 caps with a $300,000 loan amount and an initial interest rate of 4.25%.
Variable Rate Home Loans
A variable rate home loan typically offers more flexibility than a fixed rate home loan. It generally comes with a range of features which may help you react to changes in your life or financial circumstances.
For example, many variable rate home loans let you make additional repayments to pay off your loan faster, and then let you redraw these additional funds if you need them in the future. Many variable rate home loans also have an offset account feature, which could help to reduce the amount of interest you pay.
A potential drawback of a variable rate home loan is that interest rates can change at any time. This means they can go up and down. It’s a good idea to consider whether you can afford higher loan repayments if interest rates were to go up.
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What Is A Fully Amortized Loan
A fully amortized payment is one where if you make every payment according to the original schedule on your term loan, your loan will be fully paid off by the end of the term.
The term amortization is peak lending jargon that deserves a definition of its own. Amortization simply refers to the amount of principal and interest paid each month over the course of your loan term. Near the beginning of a loan, the vast majority of your payment goes toward interest. Over the course of your loan term, the scale slowly tips the other way until at the end of the term when nearly your entire payment goes toward paying off the principal, or balance of the loan.
There are differences between the way amortization works on fixed and adjustable rate mortgages . On a fixed-rate mortgage, your mortgage payment stays the same throughout the life of the loan with only the mix between the amounts of principal and interest changing each month. The only way your payment changes on a fixed-rate loan is if you have a change in your taxes or homeowners insurance. With an ARM, principal and interest amounts change at the end of the loans teaser period. Each time the principal and interest adjust, the loan is re-amortized to be paid off at the end of the term.
The Problem With The 30
So heres the big question: After looking at the math, why would anyone choose the 30-year mortgage over the 15-year?
Well, when you think about it, we do a lot of things that dont make sense.
We say heads up when we mean heads down. We call them chicken fingers, but chickens dont have fingers. We put pizzas in square boxes even though theyre round. And people who want financial freedom take out 30-year mortgages. Okay, okay, maybe its a stretch to compare 30-year mortgages to pizza boxes and chicken fingers. But seriously, contrary to what many people think, the 30-year mortgage is not a smart financial move in the long run.
Most people would probably say, “Look, I just want a cheaper monthly payment. Im not actually going to stay in the house for 30 years.”
The problem with this way of thinking is that it keeps people in debt longer. For example, if you sold the house before the 30-year term was up, youd have to use a portion of what you earned from the sale to pay off the loanwhich means youd likely take out another loan to buy your next house. Talk about stealing your wealth!
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What Is A Fixed Apr
The term fixed stands for fixed annual percentage rate. This term essentially means the amount of interest that is going to be charged over the course of a year. A fixed APR is used with many different types of loans as well as with credit cards. When borrowing money, it is important to know whether the APR is fixed or not.
There are two main types of annual percentage rates. A borrower could be charged a fixed APR or a variable APR. A fixed APR provides the borrower with a set amount of interest over the course of a year. For example, if the fixed APR is 5%, the borrower knows that he or she will pay exactly 5% over the next year.
With a variable APR, the interest rate can fluctuate. This means the interest rate is going to be tied to a financial index and it can move up and down depending on conditions in the financial markets. Many times, a variable APR will be tied to the prime rate and have a certain amount of interest added onto it. When working with a variable APR, it can be difficult to determine how much interest will be charged over the course of a year.
A fixed APR can be very desirable when borrowing money. As a borrower, it is going to be much easier to budget loan payments or payments. The borrower knows exactly how much interest is going to be charged and will be presented with a fixed monthly payment. This provides some consistency in the budget of the individual and he or she will not be surprised by any payments.
What Does A Fixed Interest Rate Mean
fixed interest rateinterest ratefixed rateraterate
Having a fixed interest rate means that you’ll pay a set amount of interest on a loan or line of credit. Unlike a variable interest rate which can go up or down in response to changes in the prime rate or other index rate a fixed rate remains the same unless the lender changes it.
Subsequently, question is, what is a good fixed interest rate? The National Association of Federal Credit Unions lists the average 30-year fixed mortgage rate at 3.937% through credit unions and 4.072% fixed through banks as of August 2019.
Accordingly, what is better variable or fixed interest rate?
A fixed rate loan has the same interest rate for the entirety of the borrowing period, while variable rate loans have an interest rate that changes over time. Borrowers who prefer predictable payments generally prefer fixed rate loans, which won’t change in cost.
What is an example of a fixed rate?
Among the most common fixed–rate products are fixed–rate mortgages and personal loans. The fixed–rate mortgage is popular because it gives the borrower a predictable monthly payment, usually for the life of the loan. A fixed–rate mortgage is the opposite of a variable-rate mortgage, such as a 5/1 ARM.
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What Is The Difference Between Fixed
Fixed-rate financing means the interest rate on your loan does not change over the life of your loan. Variable-rate financing is where the interest rate on your loan can change, based on the prime rate or another rate called an index.
With a fixed rate, you can see your payment for each month and the total you will pay over the life of a loan. You might prefer fixed rates if you are looking for a loan payment that wont change.
With a variable-rate loan, the interest rate on the loan changes as the index rate changes, meaning that it could go up or down. Because your interest rate can go up, your monthly payment can also go up. The longer the term of the loan, the more risky a variable rate loan can be for a borrower, because there is more time for rates to increase.
How To Get The Lowest Student Loan Rate
Here are a few strategies that could help you get a good interest rate on a private student loan:
- Have good credit. Your credit score is one of the main factors that will determine the rates youre offered. Youll generally need good to excellent credit to qualify for the lowest interest rates a good credit score is usually considered to be 700 or higher.
- Apply with a cosigner. If you have less-than-perfect credit, applying with a cosigner could make it easier to get approved for a private student loan. Having a creditworthy cosigner might also get you a lower interest rate than youd get on your own.
- Choose a shorter repayment term. Many lenders offer lower rates for shorter repayment terms. Its usually a good idea to pick the shortest term you can afford to keep your interest costs as low as possible.
- Compare lender options. Its important to research and compare your options from as many lenders as possible. This way, you can find the right loan with the most favorable rate for your needs.
If youre ready to start shopping for a private student loan, Credible can help. You can compare your prequalified rates from our partner lenders in the table below in two minutes.
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