by Ryan Tollefsen REALTOR
Unity Home Group at Keller Williams Realty Alaska Group
Adjustable rate mortgages (ARM) used to be all the rage during the housing boom. As times changed, favor went to fixed rate mortgages with their steady interest rates across the life of the loan. Despite the drop in popularity, homebuyers can still acquire an adjustable rate mortgage from their lender. They must go into this process well informed about their options to make the best financing decision for their needs. To help them get started, here's what homebuyers need to know about adjustable versus fixed rate mortgages.
Adjustable Rate Mortgages Start with a Low Interest Rate
The most attractive thing about adjustable rate mortgages is that they start with a low interest rate. The initial interest rate usually falls far below the market rate to entice homebuyers to choose this option over a fixed rate mortgage. The low interest rate gives homebuyers an opportunity to pay down their principle before it increases. Until this brief period ends, the mortgage payment remains low as well.
After a Set Amount of Time, the Interest Rate Increases
Adjustable rate mortgages only remain at the same interest rate and payment amount for a predetermined amount of time. After that period ends, the lender can make adjustments that affect what homeowners pay each month — and how much goes to the principle.
Lenders offer many different adjustable mortgage products that allow for a certain number of years before changes, then so many changes per year. The most popular products are 3/1, 5/1 and 7/1 ARM loans. With these loans, homeowners can expect to keep their initial rate for three, five and seven years, respectively. After that, the interest rate and other terms can change once per year.
When the interest rate changes, payments tend to increase, often substantially. Homeowners can prepare for these changing rates by watching for an estimate card in the mail. This card will come from the lender and indicates what the new rate and payment amounts will be.
Even If the Interest Rate Stays the Same, Payments May Increase
Even when interest rates do not dramatically increase, homeowners may still receive notice of an increase to their mortgage payments if they have an interest only ARM instead of a hybrid loan. With interest only adjustable rate mortgages, homeowners only make payments toward the interest during the initial period. As homeowners start to pay off the principle in addition to the interest, these loans see an increase to the monthly mortgage payment to cover that amount.
Decreases in Interest Rates Do Not Always Result in Lower Payments
With adjustable rate mortgages, borrowers can potentially experience a decrease in interest rates applied to their loan. Although this decrease will help homeowners pay less over the life of their loan, it does not guarantee a drop in monthly payment amounts. In fact, payments almost never return to their pre-adjustment range, leaving homeowners to budget in steadily rising mortgage costs.
To avoid these fluctuations, homebuyers can elect to go with a fixed rate mortgage instead of an adjustable loan. Mortgage lenders to gauge the market to set a fair and competitive interest rate for their borrowers. They also use risk based pricing models to personalize the rate to each borrower. They use a number of factors, such as the credit score and income-to-debt ratios, to dial in the ideal interest rate.
Once they identify the custom interest rate, homebuyers have a chance to review it and compare with the rate offered by other lenders. Upon taking the loan, borrowers can expect to see that same interest rate as long as they have that mortgage.
This Does Not Mean Mortgage Payments Will Not Change
More than just the interest rate affects the total monthly payments owed on the mortgage. Even with a fixed rate mortgage, borrowers can expect to see their payments change from year to year. In most cases, these payment adjustments result from a change in property taxes and homeowner's insurance.
Lenders do not usually provide a significant amount of warning before these changes. Borrowers need to stay on top of their budget and allow for last minute changes to manage the fluctuations without strife.
There are Benefits to Going with an Adjustable Rate Mortgage
Although a bit more risky than fixed rate loans, adjustable rate mortgages offer benefits to savvy borrowers. Since Palmer new home borrowers take on the risk of interest rates changing over time, lenders tend to give them a much lower rate than the market value. This gives them a head start in paying down the total amount owed on the mortgage.
If they play their cards right, they can pay down an enormous portion of the principle before the rate changes. When the interest rate increases, it will only act on the remaining mortgage balance, potentially keeping costs low over the life of the loan.
In the end, however, it is the fixed rate mortgage that offers the most stability. Since people cannot tell what the future will bring, fixed rate loans remain the top choice for homebuyers in need of a mortgage.
Home buyers have many decisions to make, and among those decisions is which mortgage is right for them. Traditional mortgages come in different types and have different repayment schedules. Understanding the different repayment schedules and how they affect the buyer can help the buyer decide which type of mortgage is right for them.
How Standard Mortgages Work
A mortgage is a home loan with a fixed repayment schedule. If the mortgage has a fixed rate, all payments are equal over the life of the loan. The loan is finished when the principal and interest equals zero.
Difference Between a 15- and 30-Year Mortgage
The primary difference between a 15- and 30- year mortgage is the rate at which the mortgage is paid off. A 30-year mortgage is divided into 360 payments of equal amounts. A 15-year mortgage is 180 payments of equal amounts.
Because the 15-year mortgage is paid off in half the time, the payments are significantly higher. The interest rate, however, is lower for a 15-year mortgage. Home buyers who are able to afford a 15-year mortgage pay less money for their home over the life of the loan.
Why It's Harder to Get a 15-Year Mortgage
One of the things that affects what kind of mortgage a buyer can get is the debt-to-income ratio (DTI). Debt-to-income ratio is the buyer's monthly debt payments divided by their gross monthly income. Most lenders will not approve any loan that pushes the buyer's DTI above 43%.
Since a 15-year mortgage has significantly higher monthly payments, not all home buyers can qualify this type of repayment schedule. The buyer must have a low DTI and a high monthly income in order afford this type of loan.
How to Choose the Right Mortgage for You
15-year mortgages save home buyers money. Over many years, home buyers who have 15-year mortgages can save thousands of dollars. However, 15-year mortgages are not right for everyone. Even if they can qualify for this type of loan, sometimes the higher monthly payment requirements can cause financial strain for the buyer.
A buyer who would like to find out whether a 15-year mortgage is right for them can do so by talking to a lender. A good lender can tell the home buyer how much they would be expected to pay each month if they had a 15-year mortgage, and whether they would even qualify for this type of mortgage. Buyers who are concerned about their ability to pay back a 15-year mortgage can create a budget to help them decide. If the buyer is unable to realistically fit payments for a 15-year mortgage into their budget, then a 30-year mortgage is likely more appropriate.
Work with a Reputable Lender and Real Estate Professional
If you're a North Pole home buyer, work with a reputable lender and real estate professional. By aligning yourself with a team of experienced professionals, you can make better decisions during the home buying process. Your lender can help you decide if a 15-year mortgage is affordable for you, while a real estate professional can help you find a home that will fit in your budget.
Disclosures are an important part of the home purchase agreement. They protect home buyers, to prevent them from knowingly purchasing a home that has expensive or irreparable problems.
Disclosures may create problems for home sellers, if there are many issues with their home when it's listed for sale. If you're a homeowner who is thinking about selling your home, you should know what the disclosures are and how disclosures are handled in your state. Educating yourself about the home purchase agreement and working with a real estate professional can help.
Disclosures Are Required By Law
Disclosures are a requirement of nearly all real estate transactions, although the disclosure process can vary from one state to another. Disclosures are typically written into the home buying contract, and must be acknowledged by the home buyer before the home purchase can proceed. This helps ensure the buyer is informed about structural and maintenance problems inside the home they're thinking about purchasing.
What Information Must Sellers Disclose?
The information that must be disclosed varies from one state to another. Some states require home buyers to disclose deaths on the property, or even hauntings. Typically, disclosures include major problems like foundation issues, broken appliances, roof leaks and broken fixtures.
How Are Disclosures Conveyed to the Buyer?
The home purchase agreement has a space for disclosures. The disclosures are acknowledged during the negotiation process, so that the buyer can adjust their offer accordingly. Homes that have serious maintenance problems often get lower offers compared to homes that do not.
What Happens if the Seller Fails to Disclose Information to the Buyer?
If a seller fails to disclose information to the buyer this could result in a lawsuit if the buyer finds out after purchasing the home, or a failed home sale if the buyer finds out before completing the home buying process. Either way, disclosures can create big problems for the seller if they fail to disclose important information during the contract negotiation.
Uncomfortable With Your Disclosures? Make Repairs Before Listing Your Home
Homeowners who don't want to disclose their home's problems in the home sale must make repairs before listing their home. For homeowners who can afford it, making repairs is often better. Home buyers typically do not want to make repairs after moving in, and will pay much more for turn-key properties.
Sellers who want to ensure they make the most from the sale of their home should focus on high ROI improvements like kitchen remodeling, and improvements to major home systems like the roof. For a homeowner on a budget, picking and choosing the right improvements is important. A good real estate agent can help the home buyer decide which home improvements will pay off and which improvements can be left to the buyer.
Have Questions? Contact a Real Estate Professional
It's important to get the disclosures right, because failure to do so could cause the Sitka AK home sale to fail. If you're a home seller who has questions about disclosures, work with a real estate professional. Your real estate professional can answer your questions to help you understand the disclosure process for your state. Your real estate professional can also tell you more about what needs to be disclosed on your home purchase agreement.
The average homebuyer will finance their purchase with a home mortgage loan. While such a loan can make homeownership possible, some loans obligate borrowers to high interest rates. This can mean that a homeowner will need to pay back significantly more to the cooperating lender over the life of a loan.
As a homeowner will need to make monthly payments that include the principal and interest on a loan, it is helpful to know how to get the most affordable mortgage interest rates available. Many looking to take out a conventional home loan from a lender will find it beneficial to get clarity on mortgage interest rates in general and the factors that can influence them.
What Is a Mortgage Interest Rate?
The amount of interest to be paid on a mortgage loan is the mortgage rate or Annual Percentage Rate (APR). Rates can depend on the length of time one has decided to pay back the loan, such as 3.91 percent for a 15-year fixed loan or 4.39 percent for a 30-year fixed loan. This is not the only factor to issue a mortgage interest rate. The type of loan matters as well. Mortgage rates can be fixed, staying the same for the life of the loan, or may vary, as with an adjustable-rate mortgage loan.
Potential borrowers should feel empowered to shop around. Mortgage rates can differ by lender and a borrower who can get approved for the lowest comparable mortgage rate can pocket thousands of dollars while still paying back their entire mortgage loan. A percentage point or two can make a big difference for the average borrower. The mortgage interest rate should be one of the most important considerations for those financing a home purchase with a mortgage loan.
How Is Mortgage Interest Rate Determined?
There are factors that a borrower has control over that will serve to influence a lender's decision. Mortgage rates will be assessed based on the size of the loan and the credit score of the applicant. Those with high credit scores are believed to be more inclined to repay the mortgage loan. In response, the lender will offer a lower mortgage rate. It is possible for potential borrowers to get a free copy of their credit report. Addressing inaccuracies and paying down debt can make for a higher credit score and better mortgage loan terms.
Borrowers may default on a loan, creating risk for a lender. Borrowers who appear to fall into a high risk category are often offered higher mortgage rates. In this way a lender can quickly recoup the initial amount of a loan, creating more security for the lender and protecting their investment.
When Is a Good Time to Apply for a Mortgage Loan?
There are indicators that can make it more challenging for an applicant to find and be approved for a mortgage loan with a low mortgage interest rate. Individuals can observe how the prime rate changes. This rate shows the lowest average rate banks are willing to offer for credit. This prime rate may also be used as the prime rate for those borrowers with the best credit scores.
The 10-year Treasury bond yield is another way to know more about the market. Expect mortgage rates to increase when the bond yield rises. Potential borrowers may want to follow the changes in the prime rate and bond yield to decide when to apply for a mortgage loan for better rates.
Is It Possible to Benefit from a Tax Deduction?
Once closing on a new Soldotna home, new homeowners have come to appreciate that mortgage interest is tax-deductible. Laws may have changed and certain caps may now be applied, however mortgage interest has long been one of the itemized deductions allowed for taxpayers. Deductions from mortgage interest have been taken on first or second home purchases, as well as rental or investment properties. A homeowner may be able to deduct the entire amount of mortgage interest paid when meeting specific criteria.
What Happens When Stretching Out Mortgage Payments?
Those interested in paying less every month toward their mortgage may want to lengthen the life of a loan. This can potentially reduce the amount of each payment but a borrower would generally be paying back more in interest to the lender. Approved borrowers may want to learn more about terms for refinancing a mortgage loan from their lender.
More to Learn
Potential borrowers may want to explore various loan options, as well as offers from multiple lenders. Banks and lenders may approve an applicant for a fixed rate or an adjustable rate loan. Having a predetermined mortgage interest rate for the life of the loan in a fixed rate loan may help those budgeting their finances. Individuals who do not qualify for a conventional loan may want to explore the terms, rates and conditions of FHA loans and VA loans.
How to Calculate Debt-to-Income When Buying a Home
When getting a mortgage to buy a new home, banks and lenders look at many things. One of the items they look at is a borrowers debt-to-income ratio. The debt-to-income ratio (DTI) in home buying doesn't solely refer to the purchase price of the home compared to the buyer's monthly income. It's a way for lenders to quickly assess someone's entire financial history in one ratio. See how DTI can affect a home buyer's chances of being approved for a loan, and what buyers can do if they want to be a more competitive candidate.
How It's Calculated
A DTI calculates total debt based on the following expenses:
After all official debt has been calculated, lenders will then compare that number to the total income of the buyer. Total income takes into account all sources of funds (e.g., monthly wages, real estate earnings, inheritance funds, etc.). DTI does not include the cost of home utilities, health insurance, or cell phone bills, but buyers should perform their own calculations before determining the price bracket for their housing search and their cap for interest rates.
What Lenders Look For
Lenders are ultimately attempting to safeguard themselves against default, so they're hoping to see as low a percentage as possible. The sweet spot is 36% (or lower). A buyer who unexpectedly loses their job may not be able to meet their mortgage payments and student loan obligations in the same month. Lenders aren't allowed to consider DTI when it comes to the terms (e.g., interest rates, etc.) of the loan, but they are allowed to consider it before approving or denying the loan. Whether income is coming from a trust or from a spouse's real estate investment, the ideal candidates will have several lucrative sources of income that they can rely on in case one disappears.
How to Manage a High DTI
DTI is an important number when it comes to loan approval, but it's certainly not the only factor. Lenders look at everything from the buyer's credit score to their overall financial history before making a final decision. In fact, buyers with a DTI of 43% or higher may be able to secure a competitive rate if they understand the rules of lending.
One solution may be to seek out small creditors for a Qualified Mortgage, or to apply for a government-sponsored program (e.g., FHA, USDA, etc.). These mortgages give lenders legal protections in case a home buyer can't repay the loan. Lenders may allow for a DTI of 50% or even more if the buyer meets specific criteria. For example, a USDA loan is typically only available if the buyer wishes to purchase property in a more rural location, but the low rates and forgiving down payment rules may be enough to make the purchase worth it.
How to Improve a DTI
Avoiding new debt and paring down old debt will always be the most direct course to improve a DTI score. Paying debt will not only improve a DTI, but it can also boost a buyer's credit score into a different bracket. A buyer's credit score will have a lot to do with the interest rates a buyer is offered, so this is a smart approach that can improve the chances of getting the loan at the right terms.
When a Sitka new home buyer understands their DTI, they have a better chance of navigating a home purchase without a lot of surprises along the way. Eliminating debt before even applying for the loan can be the way for a buyer to secure the home of their dreams.
For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.