Mortgage Planning: Fixed or adjustable?
Once you have determined the down payment size, the next most critical piece of a mortgage plan is to decide which loan program is best for you. Over the past year, most homebuyers chose a 30-year fixed-rate mortgage. As recently as 2010, Freddie Mac reported that over 95% of homeowners who refinanced chose a fixed-rate mortgage.
Certainly, there is nothing wrong with a fixed-rate mortgage – it’s just that for some people, they can save a lot more money by strategically choosing an adjustable-rate mortgage (ARM). However, not all ARMs are the same.
In the sub-prime days of 2003 to 2007, many homeowners got in trouble with ARMs, but these were not the same ARMs that are offered today. The sub-prime ARMs adjusted after just two years, and they had a very high margin so that rates could jump by 5-8% on the mortgage. These loans also carried a pre-payment penalty – leaving a homeowner stuck with either a higher interest rate for the third year, or they would have to pay a pre-payment penalty to get out of their ARM.