Borrowers have there choice of many different loan programs today. The most common choice is between a fixed rate mortgage and an Adjustable Rate Mortgage (ARM). Choosing between the two mortgages depends on many factors.

If you decide to go with a "cash flow" loan be very careful and read all disclosures and forms. You will also want to make sure what you sign at the closing table matches what your mortgage broker showed you when you signed the loan application with him.

One of the biggest factors is how long you plan to live in the home. If you know there is a strong liklihood that you will be in the house for 10 or more years then you should definately go with a fixed rate loan. If however you only plan on being in the new home for 3-5 years then there are a few options to consider. You may be able to get a better rate on a 5,7, or 10 year ARM than on a 30 year fixed mortgage. Then it is up to you to determine whether the monthly savings is worth the risk of adjustment if you end up living in the home longer than you anticipated.

Another factor to think about when deciding whether to go with a fixed interest rate or an adjustable rate mortgage is to look at the market, the current market trend and the forecast on what interest rates are expected to do in the future. If interest rates are expected to climb for the next 3 years then getting into an adjustable rate mortgage that will be less than 3 years would probably not make a lot of sense in most situations. Of course there is no way to be sure of what interest rates are going to do next month let alone in 3 or more years, but we can make some very educated guesses after analyzing the current market conditions and the current economy while looking over the past trends and the economic forecasts. Talk with your mortgage professional to find out whether a fixed rate mortgage or an adjustable rate mortgage is the best for your situation.

Many investors prefer shorter term adjustable rate mortgages because the reduced initial interest rate means more monthly cash flow. Investors often have a specific time frame by which they plan to have resold the property. The higher rate of a 30 year fixed mortgage is useless if you know for sure that you will have sold the property in 12-24 months.

If you prefer to have an adjustable rate mortgage, be sure to understand the terms of the prepayment penalty. The prepayment penalty (PPP) can be as high as the amount of the interest for 6 months. Borrowers will enjoy the lower interest rate, but be sure to understand what you are agreeing to.

Don't take out an adjustable rate mortgage in today's market before you've reviewed the new fixed rate options available to borrowers with good mortgage history. If you pay your mortgage on time, you may be eligible to obtain a 30 year fixed rate mortgage with a deferred interest minimum payment option which can lower your minimum monthly housing payment by 50% or more.

Unlike an Adjustable Rate Mortgage, the rate on fixed rate mortgages with this "cash flow" option never increases, and you can predictably defer interest without worrying about how much higher the rate is going to be when you pay it back. For many qualified borrowers, the Fixed Rate mortgage with a Cash Flow option may be the best of both worlds when it comes to the fixed rate vs. adjustable rate debate.

During periods of low mortgage rates, banks would rather offer a relatively lower rate mortgage for a short period of time than lock themselves out of higher yields when the rates go back up.

 

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