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Fixed-Rate Mortgages 95% of the Market in Third Quarter of 2009 - At What Cost? by James P Mucci
It's no surprise with all the turmoil in the markets these days, as well as the uncertainty in the housing market,[link widoczny dla zalogowanych], that 95% of borrowers taking out a mortgage, for a refinance, chose a fixed-rate mortgage as opposed to an adjustable rate mortgage (ARM). According to a recent survey by Freddie Mac, and estimated 70% of borrowers who refinanced in the third quarter of 2009, from a 15 year fixed mortgage went to another 15 year fixed mortgage. This was an 8% increase when compared to the third quarter of 2009. Compared to the fourth quarter of 2008, only 38% of borrowers who had a 15 year fixed refinanced to another 15 year fixed rate mortgage.
The fourth quarter of 2009 also brought average fixed mortgage rates to a new record low in the 39 year history of Freddie Mac's primary mortgage market survey. This has enabled borrowers to be much more comfortable with lower monthly payments, as well as the peace of mind and safety, knowing that there principle and interest payments will not change over the life of the loan. In fact, another trend suggests that a record number of borrowers actually paid down a portion of their principal balance, when refinancing. This is known throughout the industry as "cashing in" as opposed to the much more common and well known term "cashing out", or pulling equity out of home.
When markets only allow you to earn a very small return an interest in safer investments, such as savings accounts,[link widoczny dla zalogowanych], CDs,[link widoczny dla zalogowanych], and money markets, it may make much more sense to invest that money towards bringing your principal balance down, thereby reducing the cost of interest over life of your loan. In many cases is an opportunity to refinance from a longer-term to a shorter term at a lower rate, especially after adding some cash towards your principal and still end up with a payment very near which are paying now. Not to mention the added benefit of having a smaller mortgage balance when it does come time to sell, or paying off your loan in time for retirement.
While fixed-rate mortgages bring safety and security of knowing exactly how much your monthly payment is, each and every month, for the life loan, there are still other factors to consider before you complete your refinance to a fixed-rate mortgage. In fact you may save much more than you even thought possible, by refinancing to an adjustable rate mortgage (ARM).
When deciding between a fixed-rate mortgage and an adjustable rate mortgage, the first step you is to decide how long you plan to live in the home, or keep the mortgage. Many adjustable rate mortgages have fixed-rate periods,[link widoczny dla zalogowanych], these are often referred to as hybrid ARMS. For example a three-year hybrid arm means that the interest rate and payment will be fixed for the first three years, a seven-year hybrid arm means that the interest rate and payment will be fixed for the first seven years, and so on. The three most common hybrid ARM's are the 3/1 arm, 5/1 arm, 7/1 arm. So if you plan to sell your home within the next three years, five years, or seven years, and you do in fact stick to your plan, it may cost you an additional;. 25%,. 5%,. 75%, or even some in some cases 1. 0% or higher, if you choose a fixed-rate mortgage. So determining in advance the estimated time you plan to keep the mortgage your refinancing into, will help you determine if it makes sense to at least look at and compare your fixed-rate options versus your adjustable rate options that would make sense for you.
Say for example you plan to sell your home within the next 3 to 5 years, and you have an opportunity to refinance into a 30 year fixed rate mortgage, with the payment of $1200. Let's say for this example your current payment is $1400, simple math shows that you'd be reducing your monthly payment by $200 per month over the next 3 to 5 years, or $7200-$12, 000 in total payment savings over the next 3 to 5 years. Sounds great, right? Now what if your mortgage professional made a recommendation of a loan program that could give you an additional $100 per month in reduced payments, at the same terms, only with one exception -- the interest rate and payment would only be guaranteed (fixed) for the first five years. This program would give you an additional $3600-$6000 in payment savings, for a total savings of $10, 800-$18, 000 over the 3 to 5 year time frame!
The bottom line is, just because 95% of borrowers are choosing a fixed-rate mortgage, many of those borrowers may be paying thousands of dollars in interest more than they need to. This philosophy is a "pay only for what you use" and I highly urge you, next time you choose to refinance, or even take out a purchase mortgage, to at least look at additional options that may be available to you. Of course the security of the fixed-rate give you the protection, but you must at least consider the question; at what cost?
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