Confused About ARMs and FRMs??

A year ago if you were planning to get a 30-year fixed loan and compared it to a variable loan, you might of chosen what seemed as the best choice at the time. This choice would have been a variable (with a fixed term of course) loan. Today that decision for many homebuyers and homeowners is not as simple.

Today’s variable mortgage rates are very close to the fixed mortgage rates. Why is this happening? Since a year ago the Federal Reserve has raised the Federal Funds rate (short term rates) from 2.75% to 5%.

The Fed’s action has pushed the rate for short-term mortgages higher while long-term rates have kept relatively with out any major changes. Interpretation of these actions is that inflation is threatening to holders of long-term debt and increasing short-term rates is designed to prevent inflation.

What difference does it make to me and what does it mean to potential homebuyers? Obviously it presents a more difficult decision as to what type loan to use when purchasing or refinancing.

A year ago the difference in payments of a 30-year FRM loan was substantial compared to the monthly payment on an ARM loan. Today the difference is not as significant.

A simple solution to the dilemma of a low payment, which could rapidly increase at the end of the fixed term of an ARM is 30-year fixed rate mortgage with an interest only option for 10 or 15 years.

A year ago a 5/1 ARM loan (first 5 years the rate is fixed) at 4.75% for an amount of $650,000 had a payment of $3,390.71. Compare that to an interest only at 6.5%, which has a monthly payment of $3,520.83. This payment is slightly higher but knowing that the interest rate is fixed for next 30 years is a great peace of mind. By fixing a rate for a long term with an option to make interest only payments eliminates the danger of payment increase due to rising interest rates. And to add icing to the cake, when the borrower makes principal payments, the monthly payments are reduced.

This is a great safe option for many homeowner and homebuyers.