ARMs VS. FRMs

By
Mortgage and Lending with Golf Savings Bank

Many people seem to have the misconception that ARMs are a horrible loan program in most cases.  While the idea of there being a possibility of your interest rate going up and be and is unnerving to many in a lot of cases they can actually be the best way to save money depending on your long term goals. 

The only time a FRM (Fixed Rate Mortgage) is a good thing is if the borrowers are planning on staying in the home for long term AND have good credit.  Almost always an ARM will have a lower start rate than a fixed rate mortgage will.  So if a borrower doesn't plan on being in the home for more than 5 or 7 years there is no point in them paying the higher interest rate of the fixed rate mortgage.  If they only plan on owning the home for 2 or 3 years then they can save even more on a 2 or 3 year ARM.  This would a lot of times fall into the realm of most first time home buyers.  They are usually just getting what ever they can afford at the time so that they can get into the market.  Most likly with in 5 years they are going to be makeing more money and be more financially set and are going to be looking to move up into a nicer house or possibly into their dream house.  So if the lender listens to their plans and realizes they will most likely be moving with in 5 years they will get into a 5 year ARM and they won't have to worry about the rates going up before they get out of the loan.  Granted you never know 100% for sure what is going to happen in 5 years but most people have a good idea where they want to be and are working toward that goal so in most cases it's a pretty safe bet. 

For someone with not so good credit their interest rates are going to be much higher to begin with.  Sometimes the rates might actually raise their payments to the point that their DTI (Debt To Income) is to high to qualify them for the loan.  So they need the lower rate of the ARM to qualify.  Also there is no point in them paying that higher rate of the FRM over 30 years.  If they make sure to get themselves back on an even keal and pay their payments on time their credit will improve within a couple years.  So they will want to refinance at that time anyway once they qualify for a better rate.  This will save them much more money over the long term.  The tricky part here is typically poor spending habbits are a lifestyle. So you really need to stress to them to make some wiser decissions when it comes to their finances.  Perhaps even send them to a good financial planner that you know to help get them on the right track.  This is also where a lender or mortgage broker becomes more of a mortgage advisor or mortgage planner for their clients instead of just a lender or broker.

Yes there are some mortgage brokers AND lenders out there that are only trying to make a quick buck and will put their customers into what ever loan will make them the most money but there are many out there that truly do have their client's best interests in mind.  The key is to find someone who will listen to what you tell them and will explain to you what all the ins and outs are of each product until you fully understand them.

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