SCHUTT LAW FIRM, P.A.
Phone: 239.540.7007
Blog
09/14/2015

Understand Adjustable Rate and Fixed Rate Mortgages

While there are other more exotic loan products available, a potential borrower's main decision will come down to choosing between an adjustable or fixed interest rate on their loan.  So what is the difference?  And what are the advantages/disadvantages of each?  Below we will answer those questions for you, and hopefully with this information your decision will become a little easier.

Adjustable Rate Mortgage

An adjustable rate mortgage, or ARM, is a loan with a variable interest rate.  The monthly interest rate will be determined by using a base index (one year US Treasury Bills, for example) and adding to it a predetermined margin.  Thus, as the underlying index fluctuates, so will the interest rate on your loan.

ARM - Advantages and Disadvantages

The advantages of an ARM are that they generally offer a discounted introductory rate for a number of years.  This means that  a borrower can afford a larger mortgage as the early years of the loan will require smaller payments.  Also, if interest rates drop, the mortgage rate drops right along with them.  This way, the borrower immediately realizes the financial benefit, without having to refinance the loan. The disadvantages of an ARM are that they are unpredictable and if interest rates rise, so do your loan payments.  Sometimes, the increase can be dramatic.  Also, some ARMs have such low introductory rates that negative amortization can occur, which means the loan balance can rise above the original amount borrowed.

Fixed Rate Mortgage - Advantages and Disadvantages

The fixed rate mortgage finds its main advantage in the form of peace of mind.  The interest rate and payments will not change over the life of the loan, so budgeting and monitoring your finances is made easier.  They are also quite easy to understand, and for this reason are better for a first time home buyer or less sophisticated buyer. The disadvantages of a fixed rate mortgage are mainly tied to the inability to change the interest rate without a refinance.  If rates see a significant drop, a fixed rate mortgagee will have to refinance their loan in order to take advantage.  This means going through the entire loan approval process once again, and paying significant closing costs.  The lack of any discount early on also makes fixed rate mortgages unaffordable for some.

Title Insurance in Fort Myers, Florida

Taking out a mortgage signifies a large investment on the part of the homebuyer.  The average mortgagee is committing to the repayment of a six figure debt over the course of 30 years.  In order to properly protect such an important investment, title insurance in Fort Myers is key.  At Schutt Law Firm, our experienced professionals can guide you through the ins and outs of a title insurance policy, and make you feel at ease with the entire closing process.  Don't trust such an important transaction to just anyone--give us a call today at (239) 540-7007.