Imagine you’re on a horse-riding adventure. After an initially slow start the terrain flattens and the pace picks up. “Steady, girl!” you call. “Steady!” You ride all day, sometimes quickly, sometimes slowly, always trying to steady her out. Or, maybe the opposite happens. The horse travels at a stable pace throughout your trip—even when you try to slow down to catch a beautiful vista or speed up to get through a rough patch, the horse plods along at her own pace regardless of your prodding.
I think we can all agree that paying off a mortgage is quite a journey—and before you get started you’ll want to do some serious thinking about just how steady of a ride you’re looking for. What kind of horse, and what kind of trail you choose is akin to deciding if a fixed rate mortgage or an adjustable rate is better for you. Though fixed and adjustable are the two main mortgage types, how much do you really know about each one? Are you ready for a ride that’s variable, or for steady, plodding Nelly? Following is invaluable information to help you plan your mortgage journey and pick the right “ride” to home ownership.
Like a steady steed, a fixed rate doesn’t change. Your monthly payments will remain the same for the 15, 30, or however many years you’ve financed. Your interest rate is locked in. Obviously, the predictability of this loan is its draw. It’s dependable (you know exactly how much you’ll be paying each month) and it doesn’t change with the “terrain” of the market like an adjustable rate would. Regardless of the wider economic field, your interest rate and monthly payment will remain constant. This is good if you buy when interest rates are low, but could be problematic if you purchase when they are on the decline because you’ll be stuck with a higher rate while those who purchase after you might qualify for a lower rate.
Fixed rates are desirable for those who don’t want to be surprised by their monthly bill and who feel uneasy thinking that their payments are attached to a sometimes volatile market. You do pay for the certainty, though. Overall, if you choose a 30 year fixed rate mortgage you’ll most likely pay more interest over the span of the loan than someone who chooses an adjustable rate—mostly because those who choose adjustable rates generally also choose a shorter payment span to guard against the shifting market. And shorter payment span = less interest.
Like a bucking bronco, an adjustable rate can be a wild ride. But it doesn’t always have to be dangerous and there are actually some really great reasons to choose this loan type. Adjustable rate loans have a fairly low payment at the beginning of the loan span—below market rate, actually. These low payments remain fixed for a time. They then “adjust” to the market throughout the rest of the loan time frame, usually on a yearly basis. When and how this happens depend on many factors, so you’ll want to talk to your lender for the details.
Adjustable rates tend to attract those looking for larger loan amounts and, if you borrow as interest rates are falling, you get the lower interest rates without refinancing. It can also be attractive to those who don’t plan on owning a property for very long. They purchase, enjoy the lower rates, and then can sell before the payments rise.
The downsides include not knowing how much you’ll be paying each year—and a rate that could potentially skyrocket depending on the market.
Whichever rate you choose you’ll have to do some thinking about what kind of a payment you can afford and how long you plan on owning the property in question. After scoping out your financial landscape you’ll be able to make a better decision about which loan will work for you. Both loan types appeal to different riders—so saddle up, cowboy, and ride into that sunset!
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Nice newsletter. Good article. Good information. Thank you. Carol
For conventional financing, borrowers with scores at 740 or anywhere above generally receive the same loan pricing (rate and cost). That being said, the better your credit the higher your chances of receiving loan approval with high debt to income (up to 50%) or high loan to value (up to 95%) which can be a major benefit when applying for a new loan. For Jumbo financing, borrowers with credit scores above 800 are generally rewarded with both better pricing and easier guidelines. There are no situations where better credit is a negative when obtaining new financing so we should all continue to strive to reach and then stay in the 800’s.
What are the advantages of a score over 800
Thank you Mike for this information. As a residential realtor the information that you provide is crucial to a successful transaction for my clients. You are indeed a pleasure to recommend to all of my clients. You are so professional, thorough, conscientious and pleasant to work with. !!
Hi Dane! Wanted to make sure I'm clear on this. Am I right in saying that on whichever remodel is done you still take a loss rather than an increase in value - the ROI will never exceed 100% of cost?