Fixed Rate vs. Adjustable Rate

Mortgage Programs:

-Fixed Rate Mortgage Programs (40, 30, 20, 15, 10 years) – The interest rate and your mortgage monthly payments remain fixed for the period of the loan. The shorter the term of a loan, the payment is higher because the principal amount of debt is amortized over the shorter period of time. The payments on fixed rate fully amortizing loans are calculated so that at the end of the term the mortgage loan is paid in full. During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. If you are going to keep your property more than 5-7 years, you should consider getting fixed rate program. You will be protected if rates go up, and can refinance your mortgage if rates go down. Usually, fixed programs have an interest rate higher than adjustable rate programs. The higher rate, the higher monthly payment. If you are planning to stay in your property less than 5-7 years, you should consider adjustable programs. But on December, 2008 fixed rates are lower than adjustable rates. We can not explain this phenomenon.
–Adjustable Rate Mortgage Programs (ARM) – Frequencies of payment/rate adjustments dictate how often the rate can change. How the interest rate can change is a function of the index added to the margin. The index of an ARM is the basis of future interest rate changes.  The Index is regularly published in a source accessible to the public. The margin is set by the lender and is the amount above the index that the interest rate can adjust at the time of adjustment. The result of the index plus margin formula is the new interest rate. Rates and payments may go down if rates improve, but it is more risky because it is potential for high payments if rates go up. This program can be good for a short period of time. The better choice will be combined mortgage programs.
–Combined Mortgage Programs (3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM) – A combination of fixed and ARM loans with 30-year amortization period. With such type of loans homeowners can enjoy from three to ten years of fixed payments before the initial interest rate change. At the end of the fixed period, the interest rate will adjust annually. The advantage of these loans is that the interest rate is usually lower than for a 30-year fixed (the lender is not locked in for as long so their risk is lower and they can charge less) but you still get the advantage of a fixed rate for a period of time.
-Fixed (30 years) or Combined Programs with Interest Only Option (I/O) – A loan that doesn’t require a set payment each month up to 15 years. You get two payment options to choose from each month: your lender sends you a monthly statement offering an interest-only payment (1) and 30-year amortized payment – principal and interest (2). If you are going to pay off your mortgage during 10 years making large prepayment of principal, your actual rate can be decreased from 6-7% to 2-3% by using this program. For our customers we make special plan with math calculations how to save money with I/O 30-year amortized program instead of 10-year amortized fixed program. 
–First Position Home Equity Line of Credit (HELOC) – When you don’t have the 1st mortgage, you can obtain Equity Line up to 75% of the property value and up to $350K limit amount. Current HELOC rate is lower than the 1st mortgage rates and it is based on the prime rate that is 3.25% on today’s market. HELOC rate is always adjustable. With HELOC you can enjoy interest-only payments.

Availability of specific programs, Loan-To-Value ratios, Interest Rate depend on middle FICO credit score, type of documentation provided, type of occupancy, type of financed property and type of transaction.

Property Types:
SFR, 2-4 Family Houses
Condominiums, PUDs, Cooperatives

Credit:
From Excellent to Problematic
FICO Credit Scores from 620+

Documentation Type:
Full Income Full Assets (full docs)
Stated Income Full Assets
Stated Income Stated Assets

Occupancy:
Owner Occupied Properties
Second Homes
Investment Properties

Transactions:
Purchase
Rate & Term Refinance
Cash Out Refinance

Mortgage Structure:
First Mortgage Only
First & Second Mortgage
First Mortgage & HELOC
Second Mortgage Only
HELOC Only

Federal Rates vs. Mortgage Rates

After the Federal Reserve Board lowered  the federal funds rate by the 50 basis points on October 29, 2008, we received a lot of calls asking:  ” Why mortgage rates are not going down?”  Mortgage rates are not closely connected to the federal funds rate. In fact, this year the federal rates were moving down, the mortgage rates were moving in an opposite direction, up.

So back to the basic. There are 3 major types of federal rates:
1)  The federal funds rate is the rate at which banks lend money (federal funds) to each other for overnight loans made to fulfill reserve funding requirements. The federal funds rate was cut from 1.5% to 1.0%. The Federal Reserve has responded to potential slow-down by lowering the federal rate during recessions to regulate the supply of money in the US economy. Change in the federal funds rate can have the wide impact on the value of the dollar and the amount of lending. 
2) The discount rate is an instrument of monetary policy (usually controlled by central banks) that allows eligible depository institutions (such as a savings bank)  to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity. An example of a non-depository institution might be a mortgage bank. The discount rate is usually higher than the federal funds rate.
3)  The prime rate, or Prime Lending Rate, is a term applied to a reference interest rate used by banks. The term originally indicated the interest rate at which banks lend to favored customers. Some variable interest rates may be expressed as a percentage above or below prime rate. It is currently 4.00% in the United States. Prime rate is used often as an index in calculating rate changes to adjustable rate mortgages such as HELOC (home equity line) and other variable rate short term loans.

It is a common confusion to tie the federal discount and prime rates to the mortgage rates. A mortgage is a loan where the interest rate on the note and the rate adjustments are imposed by lenders. We offer you to look at the mortgage rates the following way:  the lenders charge higher interest rates for high risk loans. Believe it or not,  Real Estate today is considered a high risk investment due to a low demand for RE, falling RE prices, strict mortgage lending guidelines, the credit crunch.  The lenders treat the adjustable rate mortgages and the fixed rate mortgages differently. Adjustable rate mortgages are tied to an index on the short and middle term government securities. Fixed rate mortgages are tied to the long term securities. Usually, fixed rate mortgages are higher than adjustable rate mortgages.

Compare 2008 mortgage rate trends.