Is fixed rate mortgage better or Adjustable Rate Mortgage (ARM) better for me?
Fixed Rate Mortgage
The common Fixed Rate Mortgage tends to be 15, 20, or 30 years fixed rate. Once the interest rate is locked, the rate will not change until the loan has been paid off.
Since the U.S. interest rate is set by the Federal Reserve Board, there is the risk of actual interest rate high than then interest rate locked by the Borrower. As a result, the interest rate that can be locked by the Borrower is generally higher than the U.S. interest rate at the time being locked.
Pro: The monthly mortgage payment will not change until the loan has been paid off, which makes it easier to plan ahead.
Con: Fixed rate mortgage tends to be higher than ARM at the time being locked
Some examples of common ARMs are 3/1, 5/1, 7/1. The first number represents how many years the rate will be fixed to begin with, and the second number represents how often the interest rate will be adjusted until the loan has been paid off.
For example, 3/1, also known as 3 year ARM, is a loan with a fixed rate for the first three years that has a rate that changes once each year for the remaining life of the loan.
In the Lender’s point of view, ARM’s risk is significantly lower than Fixed Rate Mortgage. Lenders are willing to provide the Borrower an interest rate much closer to U.S. interest rate.
Pro: Perfect for Borrowers who know the interest rate will be lower in the future years, or investors who believe the value of the purchasing property will rise more than interest rate and plans to sell it then.
Con: If the Borrower’s projection of the interest rate is incorrect and it goes upward, so will the monthly payments.
Understanding the Fees You Have to Pay When Buying a House – Closing Cost
When you are purchasing a house, other than the price of the house, the Buyer also has to pay for Closing Cost. In most cases, the Closing Cost is 2 – 5% of the value of the house.
Closing Cost usually includes the following:
Loan Application Fee
Appraisal Fee – Required by Mortgage Lender
Closing Fee/Escrow Fee
Escrow Deposit for Property Taxes & Mortgage Insurance
Home Owners Association Transfer Fees
Loan Discount Points if applicable
Prorated Property Tax
And many more
What Are Discount Points?
While negotiating interest rate with the Mortgage Lender, you can choose to pay fees that is called Discount Points to lock a lower interest rate, which results in a lower monthly mortgage payment. One point costs 1 percent of your mortgage amount. This is also called “buying down the rate.”
Is Title Insurance Necessary?
When you are buying a house, the Title of the house will be transferred to the Buyer at the close of escrow. The Mortgage Lender will require Title Insurance which will not only benefit the Lender, it will also protect the Borrower. The Title Company (Title Insurance provider) will make sure the Title of the property is clean and clear. If anything wrong comes afterwards, the insurance company will pay for all the damages.
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Program rates and parameters are subject to change without notice, and may differ by geographic location. Turn times are estimates and not warranted or guaranteed. Restrictions may apply. This material is intended for use by industry professionals only, and not for distribution to consumers. This is neither a solicitation of an offer nor a commitment to lend.
The interest rate you pay on a mortgage is the single biggest factor in your monthly payments. The higher the mortgage rate, the more you will pay over the life of the home loan. It is thus very important for you to compare mortgage rates when you shop for a loan. At Valley View Home Loans our experienced Loan Advisors are ready to help. Call us or apply online and we will help with the rest. © 2017 Bay-Valley Mortgage Group, Inc. DBA Valley View Home Loans and Pacific Bay Lending Group. All Rights Reserved. NMLS # 192103. NMLS CONSUMER ACCESS . Licensed by the California Bureau of Real Estate.