Mortgage Rates
Fixed vs. Variable Mortgage Rates (ARMs)
When asking for a mortgage loan you will have to decide among two basic flavors: fixed mortgage rates and variable mortgage rates. The variable rates are also known as adjustable mortgage rates or ARMs.
Fixed Interest Rates
Fixed rate mortgages have a single interest rate associated with the mortgage for the life of the loan. In the case of fixed mortgage rates, the interest rate is determined at the beginning of the mortgage and remains unchanged, so the homeowner’s monthly payment is always the same.
Variable Mortgage Rates (ARMs)
A variable rate mortgage, also known as an adjustable rate mortgage (ARM), has an interest rate that can change according to a prespecified economic indicator.
Variable mortgage rates are often tied to well-known financial indexes such as the one-year constant-maturity Treasury securities (CMT), the London Interbank Offered Rate (LIBOR), or the Cost of Funds Index (COFI). At certain times during the mortgage period, such as once each year, the interest rate for the remaining mortgage payments is reset based on the specified index, plus a margin that is also specified in the original terms of the mortgage.
What Is The Better Mortgage Model?
There is no general answer to it. A bank offering fixed mortgage rates has to make guesses about the future development of the general interest rates. There is a risk that the future interest rates will be higher than the current ones. In order to hedge these risks the bank will usually ask for higher rates. This means that under normal circumstances you will pay more for a fixed rate mortgage.
On the other hand nobody can predict the future. If you have a guarantee about your interest rates you can safely plan with it. With a fixed rate loan you will never experience a sudden increase of your interest rate, as can happen with an adjustable rate mortgage. Many Americans lost their homes in the big mortgage crisis because of a massive increase of the interest rates for their ARM models. With a fixed rate you wouldn’t face this kind of trouble.
Adjustable Mortage Rates With Several-Year-Locks
The safety of constant rates is likely to have its price. If you aren’t willing to pay that price and can live with a certain risk you can also think about a mixture of both models. Some banks offer variable rate mortgages with three or five year locks. The rates will be adjusted, but not so frequently as with the normal variable mortgage. The costs for these loans should range somewhere in the middle of the classical fixed rates and variable rates models.