Lowest Mortgage Rate
(This article is a continuation of the article entitled “Mortgage Rate Comparison.” Click here.)
The one-year Adjustable Rate Mortgage (ARM), as opposed to the fixed-rate mortgage, does not guarantee fixed interest rate on the loan. The “one-year” attached to the label is actually the period where the introductory rate offer is good and usually will be the lowest mortgage rate as an incentive. But after that period, the rate is adjusted periodically and most likely is always an upward adjustment.
These mortgage rate adjustments are based on the LIBOR or COFI indexes. LIBOR (London Interbank Offered Rate) and COFI (11th District Cost of Funds) are indexes that reflects the fluctuating rates lenders pay to borrow money that factors in economic conditions and other market forces.
The 5/1 ARM, on the other hand, is the same as the one-year ARM but the guaranteed rate is extended to the first five years of the loan. So for five years you will enjoy a fixed interest rate for your home loan. The interest rate adjustment kicks in after the fifth year. The term of the Adjustable Rate Mortgage is usually 30 years.
The 5/1 ARM is a good option for those home buyers who are planning to sell the same property within the five year period. This is a good strategy especially if the interest rate for the five years is lower that what could have been charge to your loan if you chose other mortgage options.
Suffice it to say, the Adjustable Rate Mortgage is for people with enough savings or extra income that could cushion the impact of fluctuating interest rates. But if you are looking for the lowest interest rate in the first year or years of your mortgage then you can consider these alternatives.
The 30-year jumbo mortgages are for those buying a very expensive property usually in a high end location. The loan amount is large to be bought by big mortgage entities like Freddie Mac and Fannie Mae. These mortgage giants repackage these big loans and resell the loans as investment instruments. Jumbo mortgages are high risk loans so the interest rates are usually high.
There are still other types of mortgages such as the balloon mortgages, assumable mortgages, subprime mortgage and interest-only mortgages. We will discuss these loans in other future articles.
So either you are thinking of buying your first home or planning to get a second home mortgage, you will have to do your homework to be able to get the most affordable mortgage rate and the best mortgage type for you.