Monday, July 30, 2007

Florida Mortgage | Fixed Rate or ARM ~ the decision depends on YOU

Fixed Rate Mortgages (FRM) versus Adjustable Rate Mortgages (ARMs) is a hot topic of debate right now. There is a camp of Fixed Rate evangelists that want to force-convert all mortgagors into their fold... all-the-while the ARM holders are scared by the news of impending doom sung from the rafters by Journalists and FRM propaganda.

So now YOU want to buy a house or refinance your loan and you're getting drawn and quartered by your "trusted advisors" about whether you should get a Fixed Rate Mortgage or an Adjustable Rate Mortgage (ARM).

Different people swear by different financial philosophies... the problem is they are DIFFERENT FROM YOU. The only person that knows your financial situation is YOU. The only other person who can help you decide which loan program fits you best is your Mortgage Broker.

Your Mortgage Broker will understand the nuances of your unique financial situation and will help you decide on a loan program based on your needs and preferences TODAY as well as help you plan for the future.

The information you give to your Mortgage Broker will all filter down through his/her consultative funnel and allow them to offer you two to three loan programs to choose from as well as the features and benefits of each program for you.

There are several criteria that are weighed to make the decision. A few of them are as follows:

  • Your life stage
  • Your career stage
  • Your income and future potential
  • Your family stage
  • Your stability
  • Your property needs

A good way to show how the decision process works is via the table below.

  • Fresh out of college
  • Just got first great job
  • Family recommends buying not renting
  • Single
  • 600sq ft - 1br - Condo
  • Down Payment Assistance from Parents

Fixed Rate Mortgage

  • Secure - Rate is good for 30yrs
  • Higher Payment
  • Building Equity
  • Assurances beyond period of time borrower will need

Adjustable Rate Mortgage

  • Likely won't be in small condo long
  • New job = money is tight
  • Interest Only option helps reduce Monthly expenses
  • No real need to "build" Equity
  • Low cost of property means low appreciation
  • Really this is just a step above renting

  • 3 years later
  • Promotion at work
  • Engaged - two incomes
  • Need more space
  • 1000 sq - 3br - Townhouse

Fixed Rate Mortgage

  • Secure - Rate is good for 30yrs
  • Higher Payment
  • Building Equity
  • Assurances beyond period of time borrower will need

Adjustable Rate Mortgage

  • Double Income but increase in expenses
  • Nice but small profit on other property
  • Further from work means cost of commute
  • Interest Only option frees up monies to repay fiance's student loans
  • Interest Only frees up monies to pay off credit cards

  • Married
  • Husband gets promotion
  • New Baby
  • Refinance for Renovation of Nursery

Fixed Rate Mortgage

  • Secure - Rate is good for 30yrs
  • Higher Payment
  • Building Equity
  • Assurances beyond period of time borrower will need

Adjustable Rate Mortgage

  • More babies in the future
  • Space is already tight
  • Cash is tighter
  • Cash out with Interest Only
  • Exit Strategy - 2 yrs Max

  • Dad now Middle Management
  • Second child
  • First child in private school
  • New Dog - Need a Yard
  • Need a 5 bedroom

Fixed Rate Mortgage

  • Secure - Rate is good for 30yrs
  • Longer period in Home
  • "Family Home"
  • Salary plus investments makes comfort
  • 30yr Hybrid with 10yrs Interest Only

Adjustable Rate Mortgage

  • Expenses are manageable
  • 10 year timeline unsure (max ARM length)
  • Interest Only nice option
  • Son headed away to College
  • Daughter in Private School
  • Mom going back to work
  • Refinance to renovate home office
  • Some of Cash Out used to buy 4-plex on campus for son and friends

Fixed Rate Mortgage

  • 10yr Interest Only expires soon
  • Double Income
  • Investments Up
  • Salary plus investments makes comfort
  • 30yr Hybrid with 10yrs Interest Only

Primary Residence

Adjustable Rate Mortgage

  • Expenses are manageable
  • 10 year timeline unsure (max ARM length)
  • Interest Only nice option

  • 4-plex purchased with Cash Flow ARM... increased monthly returns

Investment

  • Both Kids in college / Empty Nest
  • Mom's career is taking off
  • Dad has promotion
  • Buying Vacation home in South Florida
  • Buying Investment Property as well

Fixed Rate Mortgage

  • Secure - Rate is good for 30yrs
  • Appreciation = good equity position
  • Investments well stocked
  • Not sure if/when full time move to Florida
  • Cash out of this property to buy 2nd Home
  • another 30yr w/10 IO? - could go either way

Primary Residence

Adjustable Rate Mortgage

  • Likely won't be in House for 10 years
  • Wintering in South Florida is great!
  • Many friends already full time Florida residents

  • 4plex in 1031 for 20plex
  • Retail Strip Center Purchased where Mom's office resides
  • 20plex bought with OptionARM
  • Strip Center 5/1 ARM

Investments

  • Retirement
  • Full time residents in Boca Raton
  • Living on investments
  • Sold home Up East
  • Enjoying grandkids' visits

Fixed Rate Mortgage

  • Timeline unknown on Primary
  • Using monies from sale of other home to add on to retirement funds
  • Great Ranch House in Gated Community
  • Ability to travel
  • Can always refinance if need for equity
  • HELOC in place for emergencies
  • Another 30yr Fixed with 10yr Interest Only

Primary Residence

Adjustable Rate Mortgage

  • Investment Properties 1031 Exchanged for more Properties
  • Large Portfolio of investment properties growing
  • Future Cash Out Refis fund purchases
  • Cash flow establishing further income for retirement
  • Investments restructured into LLCs to put in trust for kids/grandkids

Investments

___________________________________________________

As you can see, the borrowers' unique needs changed throughout the different lifecycles that they experienced. From just starting out in a job to getting engaged and needing to pay down accumulated debt to having kids that eventually went off to school to retirement...

Even investing in rental properties posed a dilemma about which way to go - Fixed Rate or ARM.

The consensus wants to say that since there are so many Winner icons in the Fixed Rate column, that it is obviously the winner by majority rules. The problem with that philosophy is that in any case shown above, if the timeline varied just slightly, the ARM might have come back in favor.

If an ARM had been chosen over a Fixed Rate Mortgage then the timeline had run longer than expected then Mr and Mrs. Borrower would have had to refinance ahead of schedule. Although, this isn't the worst problem they could have - it could speed up their timetable for investing in other properties or other investment vehicles.

The truth is that it is hard to predict change. The best that can be done for these borrowers is to sit down and consult on:

  • Where they are
  • Where they are going
  • What is their entry strategy for the property
  • What is their exit strategy

The best mortgage vehicle is whichever plan that will give them some security to make sure that their personal and financial lives are not burdened - but instead enhanced by their Mortgage.

When this occurs, their mortgage actually becomes a tool for their:

  • wealth accumulation
  • debt elimination
  • college planning
  • Investment strategy
  • future retirement incomes

The choice between the Fixed Rate Mortgage and the Adjustable Rate Mortgage is ultimately up to the borrower. The Mortgage Broker can only advise... but a good mortgage broker can show that there are definite advantages to both programs for all borrowers.


More Florida Mortgage and Real Estate News You Can Use From David A. Podgursky, MBA The Mortgage Go To Guy!! Your Source for Residential, Commercial, Investment and Relocation Mortgages in Florida

3 comments:

Daltons Briefs said...

I like this post about fixed versus adjustable rate mortgages. Quite informative, and frankly loved the stick figures.

Colleen Kulikowski said...

David -- Great post! Excellent way to break it out and explain the differences! Congratulations!

Edgar said...

Wow, your really brave to use those stick figures! Excellent post and really puts things in perspective, especially for people my age.