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Which Is Better, A 30 Year Fixed or a 2 Year Arm?

April 14, 2012 | Comments: 0 | Views: 95

If you're getting ready to refinance your home or buy a new one, one of the things you have to decide what type of terms you want for your loan. Two of the most popular choices are the 30yr fixed and the 2/28 arm (adjustable rate mortgage). Let's take a look at them both.

The terms of a fixed rate mortgage are pretty simple. Your interest rate never goes up no matter what is happening to interest rates in general. If you've got what is called a 2yr arm or a 5yr arm, your loan's interest rate is only fixed for that amount of time. So which is better?

If you have a fixed rate loan and rates are climbing, you're going to be patting yourself on the back. If you're locked in at 5% and all your friends are refinancing at 6% you've gotta be pleased with yourself. However, if rates drop and you're sitting with a 5 and everyone else is getting deal done at 4, you're probably going to be kicking yourself in the butt. Getting a fixed rate loan is the safe play. It's easier to keep on top of your finances if your main bill never changes. If you've got a variable loan that $1200 payment that you have budgeted for could suddenly wind up at $1500, leaving you scrambling as you hut for a way to come up with that extra $300. The one thing you can do if rates are plummeting is to refinance your home at the new lower rate. Of course that can be expensive and maybe not possible if your credit is less that desirable. It's just something you are going to have to crunch the numbers over before you can make an informed decision.

So under what circumstances should I opt for a loan that is only fixed for the first 2-5 years? If you we are in an environment where rates are dropping, or expected to drop you might want to opt for a loan that is variable for a short period of time. Getting any loan that is only fixed for part of the life of the loan ensures that you will get a lower rate. If you are only staying in the home for five years, why not get a loan that is only fixed for five years? It doesn't matter if rates are going up because you will have sold the home before the rate hikes affects you. Sometimes people with less that desirable credit opt for a variable loan because they cannot afford the payment that they would have on a 30yr fixed rate loan. In general, the difference between a fixed rate mortgage and a variable one is one percent; sometimes as much as another half a percent more. If you've got a $400,000 mortgage that one to one and a half percent is going to mean a huge difference in your mortgage payment. Sometimes it is a matter of qualifying. A 30 year fixed rate mortgage may put the payment too high to qualify when it comes to your debt to income ratio. If you opt for a loan that is only fixed for a couple years that gives you time to work on your credit score so you can qualify for a 30yr fixed later.

So the answer to the question, which is best a fixed rate loan or a variable, cannot be answered without first crunching the numbers to determine which makes the most sense. Both types of loans are useful for different sets of circumstances. Make sure you discuss this with your broker so together you can come up with the best loan your needs. Good luck and happy borrowing.

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Source: EzineArticles
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Fixed Rate Loan


Rate Mortgage


30yr Fixed


Adjustable Rate Loan


2yr Arm


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