It is simple mathematics: Most homeowners are only comfortable with a 30 year fixed rate mortgage. Most homeowners do not have their mortgage for longer than 5 years. Therefore, most homeowners are paying thousands of dollars in additional interest just because they don’t know all of the options available to them. For example, today’s 30 year fixed rate mortgage through company A is 5.75%. That same company will provide a fixed rate of 5.5% on a Hybrid fixed rate program that is fixed for 7 years and will then adjust annually thereafter. For a $300,000 mortgage, the 30 year fixed rate mortgage would cost $5,230 in additional interest in the first seven years and the remaining principal balance after seven years would be $1,250 higher. That’s a total of $6,480 of additional cost in seven years. Not to mention the mortgage payment would be $48 higher every single month. This translates into much more than just a higher monthly payment or thousands more paid in interest for the same money. The $48 per month could have allowed the borrower to afford $10,000 of more buying power today. With just 5% appreciation, that $10,000 would grow to $14,000 in value. That additional equity translates into $40,000 additional buying power for the next purchase assuming 10% down. Or, the $48 could go into a company matching 401K program providing over $6,000 in retirement savings (not including any gain on the account) over the seven year period.

Is 30 Year Fixed Rate Mortgage Better Than 2-28 ARM?

Scenario:

I have been recently approved for a 2/28 ARM with 5 year interest-only period and received a commitment letter. I filed bankruptcy 3 years ago but my spouse, the co-borrower has good credit, about 730. The mortgage company said the loan would adjust every 6 months. But I expected to handle this loan only for 5 years as I would pay off the car within the next 2 years. Also within the next 5 years, the bankruptcy could be erased from my credit report. Another company has offered me a 30 year fixed rate loan with 5 year interest-only payment plan. I’m trying to build up equity and refinance into a 5 year with a low rate. I’d like to know more about what I can qualify for and build up equity.

Solution:

A 2/28 year ARM is an adjustable rate mortgage which offers a fixed rate of interest for the first 2 years after which the rate adjusts itself. If this loan program comes along with a 5 year interest-only option, then the first 2 years may be great because there’ll be no rate increase during that time period. At the end of 2 years, you may get a rate increase of 3-4% and after 2 and 1/2 years (due to rate adjustment every 6 months) there can be another rate increase probabarticloly by 1%. After 5 years, there will be considerable increase in your payments because then you’ll have to pay the principal also.

The 2/28 year adjustable rate loan with 5 year interest-only option allows you to pay less on a monthly basis. But this doesn’t help you build equity as because there’s no payment towards the principal for the first 5 years. Moreover, rates would start adjusting at the end of 2 years. So, it’s important to know about the Indexed Rate attached to your loan, the margin and the rate cap. Then calculate your payments using a mortgage calculator. This will help you decide whether you can afford to manage the 2/28 ARM.

Apart from a 2/28 ARM, there are various loan programs you can opt for. What you need to do is keep looking for such programs with different lenders. Since you have a bankruptcy filed 3 years ago, I feel it will be better if you go for stable monthly payments including the principal and interest. Not that it has to be a 30 year fixed rate loan. Even a 5 year fixed may suit your situation. And, I do feel a fully amortized loan would work well for you because if you go for an interest-only option just to qualify for a mortgage, it will be similar to leasing the home while having the liability to pay for repairs. Interested in Mortgage Refinance Rates, Home Equity Rates, 2nd Mortgage Rates, or about Mortgage rate Comparison? Learn it only here. Just the Best for you. by Samantha T.