Should You Get an Adjustable or Fixed Rate Mortgage?

Recently I was speaking to my Mortgage Banker, Justin Miller at Fembi Mortgage, about the various options home buyers presently have in the mortgage market.  Since I’ve been selling real estate in South Florida since the beginning of time 🙂 , I told Justin I clearly recall when the adjustable rate mortgage was the better option for many buyers.  I asked him, if, in today’s market, the adjustable rate mortgage should also be considered a viable option.

Justin gave me the following response:

“It’s a tough call especially now when interest rates have been in the rise and the spread between fixed rate and adjustable rate mortgages is at an all time high.  Even though rates have risen they are still at historical lows.  We have all gotten spoiled because they were in the low 4%’s and high 3%’s at one time.”

“Let’s do some comparing.  We will use a purchase price of $200,000 with 20% down which will leave us with a loan amount of $160,000 all paying no points.  Keep in mind most rates that you find online are with paying a 1% or more loan origination fee which is 1% of your loan amount so in this example it would be an extra $1600.  Make sure you are always comparing apples to apples.”

“The payment on a 30 year fixed at 5.125% would be $871.18, on a 7 year adjustable at 4.5% it would be $810.70, and on a 5 year adjustable it would be $752.38.  That can add up to a lot of money saved if, and it’s a big if, you decide to sell.”

I think a 5 year adjustable is a very short period of time and should only be used for a very select few.  There is no rule of thumb for everyone.  Remember, with adjustable rate mortgages there are caps that prevent the rate from going up past a certain point each adjustment period.  Make sure you know what your margin is, the initial rate adjustable cap, and the ceiling on the rate.  Always talk to a mortgage expert.” 

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