What is a good rate on a mortgage: Fixed or ARM?
What is a good rate on a mortgage? From a 20 year fixed rate mortgage to a 5/1 ARM, it is helpful to know the types of interest. Even balloon payment mortgages can be right for certain situations.
The two most common mortgage types are adjustable (ARM) and fixed rate mortgages. Adjustable rate mortgages start with an initial fixed period, then become adjustable. Fixed rate mortgages maintain the same interest rate throughout the loan term. Understanding these two types of mortgages based on the interest rate type helps you make the right mortgage choice.
Various loan terms and fixed periods are available for fixed and adjustable rate mortgages. For fixed rate mortgages, the loan term can range from 10, 15, 20, 30 to 40 years. Adjustable-rate mortgages come with various fixed and adjustable terms, for example a 5/1 ARM.
What a good rate on a mortgage is becomes more obvious as you learn more about mortgages.
Exploring Fixed Rate Mortgages
Fixed rate mortgage rates will change based on conditions in the financial marketplace. Once the rate is set on a fixed rate loan, the rate does not change throughout the term of the loan. For example, a 30-year fixed rate avoids the need for a balloon payment. When market interest rates are low, fixed rate mortgages become more attractive compared to adjustable rates.
What Is A Fixed Rate Mortgage?
What is a fixed rate mortgage and how can it be a good option in your situation? For a home purchase or refinance, a fixed rate mortgage offers more stability. Since the type of interest is a fixed rate, the required principal and interest payment remains the same until the loan is repaid.
This simplifies your ability to manage your finances and your budget.
The longer you expect to keep the mortgage, up to 20-years or more, a fixed rate mortgage can make more sense for you. With a consistent payment amount, you have more ability to plan well. In certain situations, a mortgage with a balloon payment could be your best choice.
Your Real Mortgage Consultant will help you analyze your situation and choose the best loan type for you.
Loan Terms for Fixed Rate Mortgages
A good rate on a mortgage depends on your financial situation and goals.
While the interest rate does impact your loan, it is not the most important factor you should consider when choosing your mortgage. It is only one of the lesser considerations. Discover how to really pay less for your mortgage with three simple secrets here.
Get a credible consultation that is much better than focusing on the interest rate. Contact your Real Mortgage Consultant. Start here. With your Real Mortgage Consultant, you will learn the types of interest for different mortgage programs and what may apply to your goals.
30-year Fixed Rate Mortgages
When considering a good rate on a mortgage, even more important, focus on the total interest you will pay, not the interest rate. This will be partly influenced by what the term is for the loan.
On a fixed rate mortgage, you will pay less interest when you choose a 10-year term instead of 20-years. Of course, this will make your payments higher. Alternatively, the more years you choose to pay back the mortgage, the more you will pay in interest. While the monthly payments will be lower, your cost will be higher.
This is how people lose with their mortgage instead of WIN. Your Real Mortgage Consultant will help you do your mortgage the right way, and do it the best way for you so you can WIN with your mortgage.
A 30-year fixed rate mortgage is payable over 30 years, 360 monthly payments. Your payment will be lower, but your total cost will be much higher. You will pay more interest by spreading the payments over a longer time. In addition, a longer mortgage term comes with a higher interest rate than shorter term loans.
So, you lose in two ways. You pay a higher interest rate, and you pay that higher interest rate for a longer time, meaning your cost is much higher.
This is how banks and lenders become wealthy from your work and your loan payments. Banks and lenders make money through the accumulated interest over time. For faster loan payment freedom and with a capability to pay more, opt for a shorter term. While the required monthly payment will be higher, you repay the loan faster. This means you avoid paying more interest than necessary.
Even though you will pay more in interest with a longer term loan, it could be your best choice for now, especially if you have other loan payments. With Winner’s Mortgage exclusive Loan Payment Freedom Secrets program in the Winner’s Mortgage Master Plan, you will discover how to choose the best loan term and program for your situation.
A longer term loan with a lower payment will likely be your best choice – for now – until you pay off some of your other loan payments first with the assistance of the Loan Payment Freedom Secrets program. See more here with the Winner’s Mortgage Master Plan.
15-year Fixed Rate Mortgages
A 15-year fixed rate mortgage has the same number of payments as a 30-year amortized mortgage with a balloon payment. The 15-year fixed rate loan will be paid off at the end of 15 years. However the mortgage with a balloon payment has scheduled payments that would pay off in 30 years, but will require a final large “balloon” payment at the end of 15 years.
When you consider this mortgage, it is at a good rate and what you get is a fixed monthly payment loan for 15 years. So, a 15-year fixed rate mortgage is a great choice to reduce your interest rate and your total interest paid. If you have other loans, however, you would do better to follow Winner’s Mortgage exclusive Loan Payments Freedom Secrets program, part of the Winner’s Mortgage Master Plan.
Choose the Winner’s Mortgage Master Plan. It will help you select among the different types of interest and keep more of your money for yourself.
Compared to its 20- and 30-year versions, the 15-year fixed rate mortgage has a higher monthly payment. With a shorter loan term, you get a lower interest rate. This gives you the advantage that you become mortgage-free in half the time when you make the regular required payments compared to the 30-year mortgage.
This 15-year fixed rate mortgage is a good choice for you when you want a lower interest rate, when you do not have other loan payments, and you want a predictable payment to accelerate your loan payoff. With that predictable payment, you can better plan your finances.
It may seem as though you are paying more because of the higher required monthly payment, but you actually pay less interest instead.
10-year Fixed Rate Mortgages
You may want to consider a 10-year fixed rate mortgage. It has a higher required monthly payment than the first two types of fixed interest rate loans discussed above, the 30-year and 15-year.
With the 10-year fixed rate loan, you considerably shorten the time to pay interest. While the loan amount is the same, the shorter term requires a higher monthly payment.
What do you believe is a good rate on a mortgage? This could impact your choice of a fixed rate mortgage as you choose among 10, 15, 20 or 30 years. But do not let the interest rate unduly influence you, or you could lose with your mortgage.
If you are unsure which term to choose and you want to WIN with your mortgage, ask your dependable Real Mortgage Consultant. You can expect the truth, plus cold, hard facts and a proven track record.
Exploring Adjustable Rate Mortgages
As you consider what a good rate on a mortgage is, think about an ARM. An ARM or Adjustable Rate Mortgage refers to a loan with an interest rate that can change throughout the loan term. From a 3/1 ARM, to a 5/1 ARM to a 10/1 ARM, you have choices to determine what type of ARM loan may be right for you.
What Is an Adjustable Rate Mortgage?
Compared to a fixed rate mortgage that offers a constant rate for 10, 15, 20, 25 or 30 years, the ARM loan has an adjustable feature. An ARM loan comes with various types of interest adjustment terms. The interest rate will be fixed for a period of time but then will adjust according to defined guidelines.
An Adjustable Rate Mortgage offers various options, including a 3/1 ARM, a 5/1 ARM, 7/1 or 10/1, as examples. The first number (3, 5, 7, or 10) refers to the fixed-rate period before the rate could adjust. This fixed rate period can range from as little as 1 month to as much as 10 years, depending on the ARM type. Generally, the shorter the initial fixed period, the lower the interest rate.
When the fixed period concludes, the interest rate resets, with a new interest rate for a new defined period. Current market rates will influence the new interest rate, among other factors. Know the terms below about these types of interest rates. From terms such as 5/1 ARM to caps to margin as examples, understanding the terms will help you so much to make a wise, informed mortgage choice and WIN with your mortgage.
Adjustable Rate Mortgage Terms
Consider what a good rate on a mortgage is related to the terms on an ARM. When you understand the terms, you will better comprehend an ARM loan. Since an ARM is more complicated than a fixed-rate mortgage, it requires more explanation.
Initial Interest Period
The term of Adjustable Rate Mortgages begins with an Initial Interest Period. This is the time period at the beginning of the loan term before the interest rate adjusts the first time.
The rate will be fixed during this time, which can be as short as one month, one year, three years or sometimes as long as 10 years before the first adjustment.
The adjustment period determines how often the interest rate adjusts after the initial interest period. Annual adjustments, once per year, are common. Other adjustment periods can include monthly or every 6 months. As an example, a 5/1 ARM will begin with an initial interest period of 5 years, then adjust every year, annually, after the first five years.
An index is a specific financial indicator identifiable in the marketplace. Interest rates do not adjust randomly, rates adjust based on a specific benchmark that anyone can objectively observe.
Examples of common types of interest rate indexes include:
- Constant Maturity Treasury (CMT) – calculated by the Federal Reserve based on auction prices of government backed debt
- The 11th District Cost of Funds Index (COFI) – based on the interest rate that savings institutions pay their depositors
- Six-month London Interbank Offered Rate (LIBOR) – also available as a one-month, three-month and one-year index, determined by the rate that European banks charge each other for loans
- Monthly Treasury Average (MTA) – this is an average of the last twelve CMT indexes
Caps limit how much the interest rate can adjust. Here are the types of caps that control Adjustable Rate Mortgage rate changes:
- Initial Adjustment Cap – the maximum change for the interest rate on the first adjustment after the fixed period, common examples are 2% or 5%
- Subsequent Adjustment Cap – the maximum change for the interest rate for each subsequent rate adjustment, a common example is 2%
- Lifetime Cap – the maximum change for the interest rate over the life of the loan, a common example is 5%
Obviously, Adjustable Rate Mortgages are more complex with more moving parts than a typical fixed rate mortgage with terms like 15 years, 20 years or 30 years. Therefore, an ARM is often viewed as risky. Whether you choose a 3/1 ARM, 5/1 ARM, 10/1 ARM, or another type of ARM, caps reduce the risk of Adjustable Rate Mortgages.
The ceiling is the maximum interest rate for the Adjustable Rate Mortgage over the loan’s term.
When the interest rate adjusts at an adjustment period, the margin is one element of the formula to calculate the new rate. The margin as defined in the loan terms is added to the index value at the time of adjustment. This determines the new interest rate, as long as the new rate does not exceed the caps defined in the loan contract. If the calculation does exceed a cap, then the maximum rate adjustment is limited by the cap.
Payment-option ARM is a mortgage that allows borrowers to choose from four payment choices.
- Interest-only Payment
- 30-year Full Amortization Payment
- 15-year Full Amortization Payment
- Minimum Payment, less than the interest due resulting in negative amortization (see below)
Payment-option ARMs played a large role in the mortgage crisis of 2008-2009 due to the negative amortization feature in the loan. For good reasons, it is a loan type essentially unavailable today.
When a loan program allows for a payment that is less than the interest due, that results in negative amortization.
Negative amortization means that the unpaid interest is added to the outstanding loan balance, thereby increasing the loan balance.
The payment-option ARM loans that were popular before the mortgage crisis tempted too many people to pay the minimum amount, increasing the loan balance. When property values decreased, this set up an impossible situation, causing many borrowers to default on their mortgage.
Therefore, as you are determining what is a good rate on a mortgage, be aware that you must consider so much more than just the interest rate. Loans with a negative amortization feature may seduce with a low rate, but they are truly high risk loans.
A negative amortization loan can create a situation much like a balloon payment on a fixed rate mortgage. This means that an unaffordable payment can easily become due for both types of loans unless the borrower plans carefully and wisely.
It is always important to work with a Real Mortgage Consultant, and even more critical if you consider any type of Adjustable Rate Mortgage. While an ARM loan could be right for you, be sure with your Real Mortgage Consultant.
Types of Adjustable Rate Mortgages
Fixed rate mortgages and ARM mortgages are stated as different types of interest, such as 20 years fixed or 5/1 ARM.
Unlike fixed rate mortgages that could have a balloon payment for some loans, adjustable rate mortgages will always be stated as some combination of a fixed rate period, periodic adjustment periods or the total time the loan is adjustable. This does require some familiarity with the meaning of the numbers, since the definition can vary depending on the type of loan.
- 3/1 ARM – a fixed rate for 3 years, 36 months, then adjustable annually
- 5/1 ARM – a fixed rate for 5 years, 60 months, then adjustable annually
- 7/1 ARM – a fixed rate for 7 years, 84 months, then adjustable annually
- 10/1 ARM – a fixed rate for 10 years, 120 months, then adjustable annually
- 2/28 ARM – a fixed rate for 2 years, 24 months, then adjustable every 6 months for the next 28 years (Note how the ’28’ has a different meaning here than the ‘1’ has in the previous examples.)
- 5/6 ARM – a fixed rate for 5 years, 60 months, then adjustable every 6 months
These examples also clearly show how an ARM will begin with an initial fixed period, then adjust periodically for the remainder of the loan term.
The first number of the ARM type refers to the number of years it will have a fixed rate. However, the second number can have different meanings. For example, with the 5/1 ARM, the second number indicates annual adjustments. But on the 2/28 ARM, second number shows that it will adjust for the next 28 years.
Borrowers are notified in advance before the rate adjusts. Adjustments occur on the mortgage anniversary date.
When you work with your dependable Real Mortgage Consultant, you will be informed so you can understand your mortgage, one of the largest financial transactions of your life.
Exploring Balloon Mortgages
A balloon mortgage functions like a fixed rate mortgage with one major difference.
The balloon payment is a scheduled final large payment to pay off the balance of the mortgage.
What is A Balloon Mortgage?
Along with fixed rate and adjustable rate mortgages, you can also consider a balloon mortgage when exploring different types of interest. Similar to an ARM, it has a defined fixed period at the start of the term. For a loan with a balloon payment, though, the rate remains fixed. The payments are scheduling during only a portion of the amortized period. This means that when the payments are scheduled to end, a balloon payment is due. A substantial final payment is due or the loan will be in default. This final balloon payment covers the remaining loan balance after the end of the scheduled repayment period.
What is a good rate on a mortgage? A balloon mortgage can be a good choice for a lower interest. Of course, it’s important to remember that the interest rate is not the most important factor on a mortgage. Discover why you can’t WIN with your mortgage by focusing on the interest rate. My training “How to Pay Less for Your Mortgage With Three Simple Secrets” will show you how.
The risk with a balloon payment comes at the end of the scheduled repayment period when the large lump sum is due. If you do not plan for this payment, the consequences could include losing your home.
However, if you use a balloon payment mortgage to your advantage, you have 15 years for most loans to refinance, move or pay it off. And, even though the interest rate is not the most important factor on a mortgage, a lower rate can help accelerate your Loan Payment Freedom Secrets plan that is part of the Winner’s Mortgage Master Plan that you receive free with your mortgage from Winner’s Mortgage.
A balloon mortgage can be attractive because lenders will offer a lower interest rate. They only need to guarantee that rate for a shorter time, usually 15-years, instead of a typical 30-year term.
Your Real Mortgage Consultant will guide you to the right loan program for you. Get the plain honest truth! Your expert Real Mortgage Consultant will work with you to determine if your situation fits a balloon payment mortgage.
Advantages and Disadvantages of Choosing a Balloon Mortgage
As you decide what is a good rate on a mortgage, consider the advantages and disadvantages of balloon payment mortgages.
- Lower rates – This leads to lower monthly payments. Lower payments makes it easier to implement the Loan Payment Freedom Secrets plan and WIN with your mortgage!
- Potentially easier to qualify – With a lower required monthly payment, it can be easier for you to qualify with a lower debt-to-income ratio.
- Afford homeownership more easily – The potentially lower payment and easier qualification can make it easier for you to purchase your own home sooner.
- A longer term loan – A balloon payment mortgage gives you the potential lower rate benefits of that you may receive with an ARM loan, but with a longer time before it comes due. It can be a good compromise between a regular fixed-rate loan and an ARM.
- Risk of default – If you can’t pay the lump sum balloon payment at the end of the repayment period, you could lose your home.
- Risk of home prices declining – As we saw in the 2008-2009 mortgage crisis, home prices can drop. This means that if you have not followed our Loan Payment Freedom Secrets plan to significantly reduce or pay off your mortgage, you may not have enough equity to sell your property if needed.
- Risky for Lenders – there is a high risk that the loan will lead to failure, making it a risk for lenders too
- Consequences for not planning well – It is always a good idea to plan your finances well and your knowledgeable Real Mortgage Consultant will help you do that. But if you don’t plan well, that lump sum balloon payment could land you in financial trouble.
A Summary: Fixed, Balloon and ARM
To determine what is a good rate on a mortgage, compare the features of each mortgage type of interest rate. For example, if you are deciding between a fixed rate mortgage with 20 years term or a 5 1 ARM, this is a good start. This can also help you decide if a mortgage with a balloon payment might be a good choice for you. Here is the summary of a comparison of fixed rate mortgage and ARM.
|Feature||Fixed Rate||Balloon||Adjustable Rate|
|Interest Rate||Constant for the term of the loan.||Constant for the term of the loan.||Fixed for an initial period, then adjustable based on an index.|
|Monthly Payment||Fixed monthly, the principal and interest does not change.||Fixed monthly, with one large payment due as the final payment.||The rate will adjust over the loan term according to defined adjustment periods and index rate.|
|Final Payment||The same as all other payments.||One large final payment is due to pay off the remaining balance.||The final payment is the same as other payments, except for the rate adjustments.|
|Loan Term||Payments are calculated and due for a determined number of years.||Although payments are calculated based on a longer term, the loan must be paid off in a shorter time with one large final payment.||Payments are amortized evenly over a defined loan term.|
What is a good rate on a mortgage? As you can see, there is not one right answer.
Know that the interest rate is not the most important factor on your mortgage. This is contrary to what society tells you.
Contact your fully trained Real Mortgage Consultant who will help you put the mortgage in its proper perspective and get it right.
Start here with this important training “How to Pay Less for Your Mortgage With Three Simple Secrets”.
Then, your experienced Real Mortgage Consultant will help you choose the right loan program that best fits your needs.
To really discover what a good rate on a mortgage is, Get Started here.