Borrowing

Debt can be a double-edged sword. Borrow wisely, and you may create the opportunity to build equity—for instance, in a home, or maybe even in yourself, with an education. But rack up too much debt, and financial distress could be around the corner. You can discuss the pros and cons of borrowing with your Wealth Alliance Advisor.

CHOOSING A MORTGAGE

Selecting a mortgage isn't an easy process. Get a better understanding of how professionals make the right decisions.

SHOULD YOU CHOOSE A FIXED OR VARIABLE

Tip: Common Indexes. The most common indexes to which the interest on adjustable-rate mortgages is pegged are the 1-Year Constant Maturity Treasury Index, the Cost of Funds Index (COFI), and the London Interbank Offered Rate Index (Libor).
Source: Bankrate, 2016

Buying a home is the single largest financial commitment most people ever make. And sorting through mortgages involves a lot of critical choices. One of these is choosing between a fixed- or variable-interest-rate mortgage.

True to its name, fixed-rate mortgage interest is fixed throughout the life of the loan. In contrast, the interest rate on a variable-interest-rate loan can change over time. The mortgage interest rate charged by a variable loan is usually based on an index, which means payments could move up or down depending on prevailing interest rates.¹

Fixed-rate mortgages have advantages and disadvantages. For example, rates and payments remain constant despite the interest-rate climate. But fixed-rate loans generally have higher initial interest rates than variable-rate mortgages; the financial institution may charge more because if rates go higher, it may lose out.

If prevailing interest rates trend lower, a fixed-rate mortgage holder would have to refinance, and that may involve closing costs, additional paper work, and more.²

With variable-rate mortgages, the initial interest rates are often lower because the lender is able to transfer some of the risk to the borrower; if prevailing rates go higher, the interest rate on the variable mortgage may adjust upward as well. Variable-rate mortgages may allow borrowers to take advantage of falling interest rates without refinancing.³

One of the biggest advantages variable-rate mortgages offer can be one of their biggest disadvantages as well. Rates and payments are subject to change, and they can rise over the life of the loan.

Fast Fact: Death Pledge? The word “mortgage” comes from the Old French words “mort,” meaning “dead,” and “gage,” meaning “pledge.”
Source: Dictionary.com, 2017

Should you choose a fixed or variable mortgage? Here are four broad considerations:

First, how long do you plan to stay in the home? If you plan on living in the home a short time before selling it, you may want to consider a variable-rate mortgage. With a shorter time frame, the loan will have less time to move up or down.

Second, what’s happening with interest rates? If interest rates are below historic averages, it may make sense to consider a fixed rate. On the other hand, if interest rates are above historic averages, it may make sense to consider a variable rate loan. Then if interest rates decline, your interest rate may fall as well.

Third, under what conditions can the lender adjust the rate and payment? How frequently can it be adjusted? Is there a limit on how much it can be adjusted in each period? Is there a lifetime limit on how high the interest rate and payment can be raised?

And fourth, could you still afford your monthly payment if interest rates were to rise significantly? How would it affect your finances if your payment were to rise to its lifetime limit and stay there for an extended period?

For most, buying a home is a major commitment. Selecting the most appropriate mortgage may make that long-term obligation more manageable.

  1. Bankrate, January 26, 2016 
  2. Nolo.com, 2017
  3. Bankrate, January 26, 2016

Average Interest Rate: 30-Year Fixed-Rate Mortgages

According to Freddie Mac, the average rate on 30-year fixed-rate mortgages was 3.65% in 2016, which was up from the previous year, but still below historical averages.

Average Interest Rate

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

LOTS OF VARIABLES WITH FIXED-RATE MORTGAGES

Tip: Payment Practices. Depending on the loan, a home buyer who chooses a 30-year mortgage may have the option to make extra payments. In a sense, this enables the borrower to treat the long-term loan like a short-term one.

When selecting a fixed-rate mortgage, a prospective borrower has to determine how many years to finance the loan. Some financial institutions offer 10- and 20-year fixed-rate mortgages as well as 15- and 30-year fixed-rate home loans.

For the purpose of comparison, this worksheet takes a look at 15-year and 30-year fixed-rate loans.

The payments on a 30-year mortgage are generally lower than 15-year loans, but their interest rates tend to be higher. The lower payment comes from spreading out the loan over twice as many payments. Because of the longer time frame, a 30-year mortgage owner pays more in interest payments than a 15-year mortgage holder.

15 Years vs. 30 Years

Fast Fact: Theory in Practice. These days about 90% of homeowners choose 30-year fixed-rate mortgages, 6% choose 15-year fixed-rate loans, and 2% choose adjustable-rate mortgages. 
Source: FreddieMac, April 10, 2017

A 15-year mortgage is paid off twice as quickly as a 30-year mortgage, which allows the home buyer to build equity at an accelerated rate. The payments on a 15-year loan are higher — but they aren’t usually twice as high — as a 30-year loan.

To get a better idea of the differences, take a few minutes and add some numbers to the accompanying worksheet.

Worksheet

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

SHOULD I PAY OFF DEBT OR INVEST?