Once you have decided to buy a home or have been eyeballing the falling mortgage rates (at this writing they are hovering around 5%, a low unseen since the sixties), the fixed rate should, for a vast majority of people, the mortgage of choice.
But as with all financial dealings of this size, you should be well aware of the pros and cons to such a loan.
On the upside, the comfort of having a fixed cost for your loan, unable to adjust over time, can be all the reason you need. We have seen the recent financial crisis unfold in the housing market first. The adjustments made to adjustable rate mortgages were the primary problem with banks and investors who bought these mortgages all bundled up in a financial product known as a Mortgage Backed Security or MBS. That fear is very palpable and will be the main catalyst towards fixed rate mortgages in the coming year.
For those eyeing retirement, fixing this cost will make retirement planning just a bit easier. Finding as many fixed costs as possible will benefit not only that plan for the future but help align some budget problems in the present.
Another pro that is hard to dismiss: your ability to sleep at night, function without the worry that you do not know where you stand financially, and the improvement these subtle changes in your finances can have on your health.
On the downside, there is the anxiety that, should rates go lower yet, you will be unable to redo what you have done. This can happen during the lock-down period, a time when, during the application process, you can lock-in your loan rate. Doing this might fix the mortgage rate just before it goes up again. But, on the flip side, a locked-in rate might have you holding on to a deal that you would like to renegotiate - but cannot.
What is a locked rate? In short, according to the NEA financial website for its members, "the loan pricing is protected from changes in financial market conditions" with "your specific transaction characteristics (points paid, loan-to-value, etc.) and your credit profile" in place.
The timing can vary on a locked-in loan rate to as long as 60 days. Confident lenders may offer the best customers twelve months. Once you find a property you want, begin the refinancing process you can lock-in. You also have up until five business days before the closing to do so. For this last group, they have chosen to float their rate, hoping to get a better deal in the near future.
Some borrowers may change their mind several times during the process but be warned, moving from a float to lock and back again will cost you. use this calculator to work out the numbersto determine subtle changes in locking a rate in and changes - both up or down, that might occur during the transaction.
Trouble is, no one can tell you what is right. Some reports have pointed to rates in 2009 as low as 4.5%. The best way to approach it though would be to think of it in these terms: 6% is historically low; 5.5% is worth the effort and even if the rate rises to this point, you will be far better off than had you refinanced at any other point. 5.5% is the lock ceiling. Five percent fixed rate mortgages on down are worth locking into at the time of the application. I say this for one reason alone: we have all seen how quickly the financial market can go from calm to turmoil and that market quickness is enough of a reason to take anything below 5.5%.
Either way, the best option for most borrowers, whether looking to refinance or buy for the first time is to look for fixed rate mortgage offers and opportunities. Question is, should you use a broker or a bank for that mortgage?
