Adjustable vs Fixed Rate Mortgages – Which is right for you?

You’re shopping for a house.  You’ve done your homework researching rates, terms, different lenders, etc.  But, did you look at different loan options as well?  How do you decide if a fixed rate or adjustable rate mortgage is right for you?   There are pros and cons to both fixed rate mortgages and adjustable rate mortgages (ARMs).  The loan that makes the most sense for you will depend on your preferences, financial standing, and future plans.

First let’s look at the difference between fixed and adjustable rate mortgages.  Fixed rate mortgages have an interest rate, and therefore a monthly principal and interest (P&I) payment, that remains the same over the life of the loan.  An adjustable rate mortgage, as the name suggests, means that the interest rate can fluctuate over the life of the loan, according to the variables laid out in your original loan agreement.  (For details on understanding adjustable rate mortgages, refer to this post). With both loan types, you can generally choose a term that fits your needs – 10, 15, 20, 30 years.  Assuming that you’d be shopping for a loan term of 30 years, here are some factors to consider.

1.       How long do you plan to stay in your home (or mortgage loan)?  

Many people do not plan to stay in their homes or mortgages long enough to make a fixed rate loan worthwhile.  On average, homeowners move every 8-10 years and refinance their mortgage even more often than that.  If this sounds like you, you may want to consider an adjustable rate mortgage over a fixed rate mortgage.  Rates on fixed rate mortgages tend to be somewhat higher than the initial rate on adjustable rate mortgages.  This is because when the loan is written the lender assumes that you will take the full 30 year term to pay the loan back.  If rates go up over the lifetime of the loan, the lender may end up losing money.  If you do not plan to stay in your home long enough to see the interest rate change on your adjustable rate mortgage, if you expect to refinance your loan in 5 to 10 years, or if you can afford a slight increase in your P&I payment for a year or two before you move, why pay extra interest up front for the reassurance of a fixed rate loan you’re not going to keep long enough to enjoy? 

2.       What are the trends with interest rates? 

If you expect rates to increase over the term of your loan, then it may make sense to lock in a low fixed rate today.  However, if you if you opt for the fixed rate and interest rates later fall, you will have to refinance in order to lower the rate on your mortgage, paying closing costs all over again.  An adjustable rate mortgage, on the other hand, allows your interest rate to adjust to the market, so if rates stay low or drop, the same could happen to the rate on your mortgage without the hassle of refinancing.  Many people worry that if they opt for an adjustable rate mortgage and rates increase, they will start out paying 3% and end up paying 20%.  In reality, if you choose a good adjustable rate mortgage, you do have some protection.  Your ARM will come with rate caps, both for each adjustment and for the lifetime of the loan, to prevent sudden, astronomical rate hikes.   This ties into the first point as well, since the longer you plan to stay in your home, the more uncertainty there is in predicting interest rates. 

3.       How do you budget?  

If your monthly housing budget is very tight and you would not be able to afford even a small increase to your monthly principal and interest payment, the fixed rate loan probably makes more sense even if it will cost you a bit more or you do not plan to stay in the home for a full 30 years.  However, you should consider that a fully escrowed payment on a fixed rate loan could still change.  The P&I payment will remain the same, but varying tax and insurance costs over the time you own your home can still lead to changes in your total monthly payment.  Conversely, if you can budget for changes in your principal and interest payment then the up-front savings of an ARM may make up for payment increases down the road, especially if you use the initial savings to pay down the loan faster.  Each adjustment to the payment is calculated based on the remaining principal loan balance at that time, rather than the initial amount borrowed.  So if you pay your loan down ahead of schedule, you could end up enjoying decreasing monthly payments even if your interest rate increases slightly!

4.       How much flexibility do you want or expect? 

Most fixed rate loans are sold to the secondary market, meaning that while you might get your loan at XYZ Credit Union or ABC Bank, it will probably ultimately end up being owned and serviced by Fannie Mae or Freddie Mac.  This results in essentially a “standard” fixed rate loan that varies very little from one financial institution to another; whereas institutions often retain adjustable rate mortgages on their own books.  This allows for greater flexibility and customization of adjustable rate mortgages.  Even something as simple as splitting your mortgage payment into two bi-weekly payments in order to reduce the amount of interest you pay can be difficult (or cost money) when your loan is sold to the secondary market.

The loan type that is right for you is going to be totally subjective and will depend a lot on how you expect the future to play out.  The most important thing you can do in shopping for a mortgage loan is get the facts straight.  Make sure that you understand all the terms you’re being quoted, and what they actually mean in regard to how your loan will behave. 

As final food for thought, here is a scenario that was put together by Freddie Mac to compare the costs of fixed rate loans versus adjustable rate loans:

In January 2003 the average fixed rate mortgage came in at 5.92%.  For a loan of $200,000 the principal and interest payments for 10 years would have cost you $142,660.  However, an ARM that adjusted annually had an initial rate of 3.99%.  Even after recalculating the interest rate each year, the total amount paid in principal and interest for that same loan and time period came to only $119,181 – a savings of over $23,000!  The adjustments on the ARM loan did increase the rate to 5.47% at its peak, but that is still lower than the 5.92% you would have paid on the fixed rate loan.  And, at one point the ARM rate fell to 2.76%.       

What is Credit?

            Before I worked at Horizon Community Credit Union, I didn’t know much about credit and credit scores. I didn’t care either, and I couldn’t comprehend how one number could impact my life. I had no idea the extent to which a credit score was used, how it was formulated, or what it even meant. I’m still learning today! I now know how important a good credit score is, and I want to make sure you know too!

            Your credit “is your reputation as a borrower (Pritchard).” That reputation is supplemented by your credit report and credit score, as defined by the big three credit bureaus. All of this is taken into consideration when making lending , insurance, residence, and employment decisions. Confused? Hold on, I’ll explain!

            The big three credit bureaus that track your borrowing history are Equifax, Experian, and TransUnion. They are for-profit companies that are publicly traded on the stock market, but they are regulated by the federal government through the Fair Credit Reporting Act (Irby). You can get one free copy of your credit report from each of the listed credit bureaus. If you aren’t already getting your one free credit report from each agency, you should begin doing so. You may learn things about your credit that you didn’t know, and you may find mistakes that you need to correct. FICO, as you may hear about from Discover commercials, is not a credit bureau.

            Credit scores give the “big picture” view of your credit, and they vary a little between credit bureaus. As you can imagine, there’s a lot of information that goes into a credit report. Scores are generated by a computer program, which reads through all your credit information and generates a score. According to Credit.com, this is the scale for credit scores:

Excellent                   781-850

Good Credit            661-780

Fair Credit                 601-660

Poor Credit              501-600

Bad Credit                Below 500

            So now what? Check your credit scores, and go through the reports, and make sure all of the information is accurate. Then go to your financial institution of choice and make an appointment with someone to ask any questions and discuss ways to correct problems and increase your credit score. Be active and follow through. Credit scores are used to approve decisions in pivotal areas of your life. It’s crucial that you take an active role in increasing your score, so that your borrowing past will not hold you back from the dreams of your future.  For more tips, check out my sources, as well as this previous blog post, written by a loan officer. 

Breanna B.

Sources:

What is Credit? By Justin Pritchard

http://banking.about.com/od/creditscoresandreporting/a/whatiscredit.htm

Who are the three major credit bureaus? By LaToya Irby

http://credit.about.com/od/creditreportfaq/f/creditbureau.htm

What is a Good Credit Score? By Geri Detweiler

http://www.credit.com/credit-scores/what-is-a-good-credit-score/

Tips to Paying off Student Loans!

Image courtesy of ddpavumba at FreeDigitalPhotos.net

Being a recent college student can be very stressful. Maybe even more stressful than being in college! Between finding a good steady job, paying all the bills, AND paying your student loans I know it can be really difficult to stay afloat. When you graduate college, most student loans taken out through the government have a 6 month grace period until the payback period begins. Right out of college with all the other bills coming in, it may seem that the best idea is to not start paying your student loans until you actually HAVE to, but really it isn't. Getting a head start on your loans can help you a TON in the long run.

Just because you aren't “required” to start paying the bill, it doesn't mean that interest isn't accumulating on the totals. Interest can build up fast on loans, especially if the balances are high. So let’s go over a couple quick tips that can help you get a head start on those loans!

• Tip #1: Skip the morning coffee run to Starbucks or McDonald’s everyday, and instead set that money aside each week for one month. On average a cup of coffee ranges from $2-$5, so meeting in the middle, let’s say each cup costs $3.50. Having a cup of coffee at least five times a week, $3.50 * 5= $17.50. Now if we get coffee five times a week for one month that can equal approximately $70! Seventy dollars may not seem like a lot, but that’s $70 less you have to pay interest on! Skipping some of your most costly habits may seem like a breeze so why not challenge yourself to quit multiple habits and save even more money! 

• Tip #2: Take a look into consolidation programs available. By consolidating your loans it allows you to have a lower interest rate and only have ONE payment, versus the five or six you may have for each loan. There are many different financial institutions, as well as other companies who offer consolidation programs. Be smart about it though, really look into each program and their benefits. You want to make sure you are getting a BETTER deal than what you currently have, not vise versa. 

There are many other game plans and options to consider when paying off your student loans, but these two options are ones that ANYONE can tackle. Also keep in mind, if you need somewhere to keep any of these savings HCCU is always here to help!

Post by: Emily P. 

Free Up Cash & Increase Your Financial Cushion

As a nation, America is not great at saving. More than 55% of American households have less than one month worth of income in liquid savings (cash, or savings or checking account). Are you one of them? Even taking into consideration retirement accounts and investments, the average family can only replace four months of income in the case of an emergency. Here are a few tips for increasing your savings and curbing your spending:

Consolidate Debt: By consolidating credit cards or loans, you can often save on interest and lower your total monthly payment, not to mention simplifying it, by just having one payment to make. The key to consolidation is to cut up those old cards, then, or close them all together. Consolidating won’t help you at all if you turn around and run up even more debt again!

Refinance Your Mortgage and Vehicle Loans: You may qualify for lower rates if you refinance. Mortgage rates are still low, so if you haven’t refinanced in the last five years or so, check your rate and compare it to offered rates in your area. If you had a mortgage loan with private mortgage insurance (PMI) see if you have paid your balance down enough to remove that coverage. If it makes sense for you, you could also extend the term of your loans to decrease your monthly payment.

Go Green: Many companies offer a discounted loan rate for borrowers who set up automatic payments for their loans. Check to see if this is offered at your financial institution. Using automatic payments can also help prevent late fees by making your payment for you, on time, every month.

Review Insurance Coverage: When is the last time you really reviewed your insurance policies? Check the rates that you’re paying and compare your rates to those of other companies on the National Association of Insurance Commissioners website. You could save money on your monthly premiums if you raise your deductible. Make sure you’re covered for what you need, but not paying for things you don’t need. You may be able to get rate reductions or discounts if you have vehicles you only use seasonally, if you have children off at college who are not typically driving, or if you have a high school student getting good grades.

At Horizon Community Credit Union, our loan officers would be glad to review your current debt and look for ways to save you money. We have great, low rates on mortgage loans and vehicle loans. You can get loan interest rate rebates for having a checking account with HCCU, for having direct deposit and automatic payments, or for being a Gold or Platinum SunDrops member. Finally, we also have partnerships with insurance companies including Liberty Mutual and TruStage. If you don’t have a savings cushion, don’t wait for a financial setback, start taking steps today to keep more money in your pockets each month!

Image courtesy of iosphere at FreeDigitalPhotos.net

Post by: Erin S. 

If you missed the Home Building Seminar, you're in luck!

One of the area’s top builders, realtors, title and homeowner’s insurance agents, and mortgage lenders came together on October 21st to answer a range of home building questions, some of the most common of which are listed below. 

· Will my home fit on my lot?
· Which plan is best for my family?
· How much can I customize?
· What will my new home really cost?
· What are the best rates and financing programs?
· What is the building process?

If you missed the live event, you're in luck!  We recorded the seminar and you can watch each segment now on YouTube, just click the link below!  From shopping for a builder and a lot, to securing a construction loan and taking draws, to your end mortgage financing and insuring your new home, our seminar covered it all!

Horizon Community Credit Union Home Building Seminar 2014

If you have any questions after watching the recording, or if you would like to start the home building process, feel free to reach out to any of the participants listed on the contact sheet!

Benefits of Taking Out a Loan with a CU vs. a Bank

Lower rates: Auto loan averages for CUs as of July were 2.85%  on a 36 mo. car loan vs. Banks @ 5.59%.  Therefore, banks are charging nearly twice as much for the same loan.

Easier to borrow: Community-based CUs tend to be easier to deal with than megabanks. Lending decisions are more likely to be made locally with more flexibility.

In addition, while few national banks make signature loans(unsecured loans), CUs regularly offer this type of loan to their members with good credit.  CUs also offer lower-dollar loans than banks.  You could get a $500 signature loan with a CU, but probably not at a bank because it wouldn't be profitable to them.

Loans through CUs are usually reviewed and completed in a much quicker time-frame.

Lower fees:  When it comes to fees, you will probably find better deals at CU’s than at giant commercial banks.  Whether is for fees to maintain loans, checking accounts, ATM fees, or penalty fees for overdrawing, you are more likely to have fewer and lower fees at your CU.

Credit Unions are typically smaller than banks so talking with, meeting with or working with a real live person happens much sooner in the loan process.  If you've been a member for a while, you might have even talked to the person who makes the decisions on the CU's loans.

Credit Unions offer loans that a lot of traditional banks do not.  Overall, CU rock compared to traditional banking institutions!

Post by: Lori S.

Just Say NO to Payday Lenders!

I’m sure you've seen or heard the commercials for payday or title loans that give you cash in 30 minutes or less, but hopefully you haven’t (and won’t) sign up for one of those loans. Want to know why? Keep reading.

Have you read the fine print??????? Do you know that many of those places charge over 300%APR for a loan? OMG…300%....no, that’s not a typo, there shouldn’t be a decimal in there, three hundred, not kidding (unfortunately). Let that sink in for a minute.

So what does 300% APR mean exactly? Well, if you go there and get a loan for about $1000, and pay it back over 6 months, you will pay back roughly double what you borrowed. That’s right, they give you $1,000 and you pay them back about $2,000. If you can pay it back on time exactly as agreed upon. As if that isn’t bad enough, if you can’t pay it back on time (which is what often happens), they can automatically withdraw what you owe from your account. What typically happens when they try to do that? You overdraw your account and are charged a fee. Then they try to withdraw the money again, and you probably still don’t have it or you would have sent it to them, so you overdraw your account again and are charged another fee. Wait, this happens one more time, because they can try to take the money 3 times for each payment, so there’s another fee. Now you still owe your payment, plus you wasted all that money on 3 NSF fees, and the payday loan place probably has some sort of late fee or NSF fee too. Do you see how this can start to snowball quickly and put you deeper and deeper into debt with no good way out? It happens too often, and we don’t want it to happen to you!

To give you something to compare to, that same loan here would come with a rate of between 3% and 16% (rates are determined by a number of factors including your credit score and history, amount of unsecured debt, and past bankruptcy). Even using our highest rate of 16%, if you borrowed $1,000, you would pay us back roughly $1,050. That’s quite different from the example above where you borrow $1,000 and pay back $2,000. What would you do with the $950 you saved? You can probably think of lots of things, that’s a lot of money!

So JUST SAY NO to Payday Lenders (or anyone else charging a ridiculously high interest rate for that matter). Call us, tell us your situation and let us try to help. Whether it’s a loan here, at a dealership, a bank, or another credit union, know what you are agreeing to before you sign anything.

Here are some questions you should ask every time you apply for financing anywhere:
· Is there an application fee?
· What is my interest rate?
· What is the repayment period?
· What is my monthly payment and can that amount change? If it can change find out what would cause it to change, how often it can change, and how much it can go up.
· Is there a penalty for prepayment?
· How much will I pay in interest over the life of the loan?
· What happens if I default?

Post by: Cari J