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Collins Community Credit Union

The Triple CU Scoop - Mortgage Basics, ARM vs. Fixed-Rate

Published on Feb 23, 2015

We've got another guest blogger on The Triple CU Scoop this week. Real Estate Loan Officer, Tom Axvig, explains the difference between Adjustable-Rate Mortgages and Fixed-Rate Mortgages.

"Buying a home isn’t like buying a new car… it’s a little more complicated. That’s why we want to provide you with the tools and resources to make the home buying process as simple as one, two, key!

If you’re thinking about house hunting, but aren’t sure where to start, check out our YouTube channel. We’ve created a home buying series that details credit building tips, first-time home buying tips, the importance of working with a realtor, how to apply for a mortgage and more.

Once you’re serious about buying a home, sit down and figure out your budget. Use our online calculators to get an idea of what you can afford. And, schedule an appointment with a Collins Community CU Real Estate Loan Officer to get pre-approved for a mortgage.

Collins Community Credit Union Dream Home

Now, keep in mind, we offer a variety of loan options to meet your needs. Our Real Estate Loan Officers will help you make an informed decision and guide you on which option is best for you, but you should know a few mortgage basics before you dive right in.

There are two main types of mortgages, a Fixed-Rate Mortgage or an Adjustable-Rate Mortgage (ARM).

A Fixed-Rate Mortgage means the interest rate you pay on your home loan won't change. Over the years, your mortgage payment will likely change some – property taxes will likely rise, your homeowners insurance might climb or fall, or you might shed your Private Mortgage Insurance. But generally, if you have a fixed-rate mortgage, your monthly mortgage payment won't change much over the years.

Advantages

  • Rates and payments remain constant. There won't be any surprises even if rates increase.
  • Stability makes budgeting easier. Home buyers can manage their money with more certainty because their mortgage payment won’t change.

Disadvantages

  • To take advantage of falling rates, fixed-rate mortgage holders have to refinance their mortgage, which normally means paying closing costs.
  • The initial rate is higher than an ARM and some buyers don’t live in the house long enough to see the long-term benefit of a fixed rate.

An Adjustable-Rate Mortgage, also known as an ARM, is essentially the opposite of a fixed-rate mortgage. This option has a set, low fixed rate for a certain period of time, then for the remainder of the loan the interest rate adjusts annually depending on the market. While your interest rate and payments may be lower in the beginning, if interest rates climb, so will your rate and payment. An ARM is a great option if you’re not looking to stay in a property long or you anticipate growth in your income over time.

Advantages

  • This option comes with lower rates and lower payments during the initial fixed period. Because lenders can use the lower payment when qualifying borrowers, buyers can purchase larger homes than they otherwise could (depending on length of ARM).
  • An ARM allows borrowers to take advantage of falling rates without refinancing. Instead of having to pay closing costs and fees, again, ARM borrowers can sit back and watch the rates, and their monthly payments, fall.
  • This option is great for borrowers who don't plan on living in one place for very long to buy a house.

Disadvantages

  • Rates and payments can rise significantly over the life of the loan. Each ARM is a little different with adjustments after the initial period.
  • The first adjustment can be a large because some annual caps don't apply to the initial change. A borrower with an annual cap of 2% and a lifetime cap of 6% could theoretically see the rate shoot from 4% to 10% a year; and, after closing, if rates in the economy go up.

If you have questions about the home buying process, we’re happy to help! Click here to contact one of our Real Estate Loan Officers, today."

 Collins Community Credit Union Real Estate Loan Officer Tom Axvig

Tom Axvig
319-743-4677
taxvig@collinscu.org
NMLS# 400252

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